An ELSS (equity-linked savings scheme) fund and an SIP (systematic investment plan) are the major investment instruments that come to your mind when you give a thought to mutual fund investments. However, you cannot strike a comparison between both as ELSS is a type of diversified equity scheme under the category of mutual fund whereas an SIP is just an investment route, like recurring deposit, through which you can invest your funds in ELSS or any scheme of mutual funds on a periodic basis to generate long term returns. Read on to understand what an SIP and an ELSS fund are.
What’s an ELSS fund?
An ELSS fund is the only tax-saving mutual fund that allows tax deductions under Section 80 C. As per Section 80 C, you are allowed to claim deduction of up to Rs 1.50 lakh per year. However, such funds have a lock-in period of only 3 years, which is the shortest lock-in among all the tax-saving financial instruments. Such funds are highly capable of offering inflation beating returns and thus, can be utilised as a means for generating long term returns.
What’s an SIP mutual fund?
An SIP is a method of mutual fund investment. Like an SIP, lumpsum is also a way to invest in mutual funds. Among these two options, you as a retail investor may usually prefer to invest through the SIP route in mutual funds as this mode permits you to invest small amount as less as Rs 500 on periodic basis, say monthly, quarterly, bi-annually, etc. as per your comfort. Additionally, one of the prudent benefits offered by an SIP is the elimination of the stress of checking the markets as well as timing your investments. As you constantly invest in a mutual fund through the SIP route, you tend to buy higher number of fund units during falling markets and lower number of fund units during rising markets. So, this helps in averaging out your investments to create a well-balanced portfolio. Also, when you make an SIP investment, the monthly gains derived from an SIP are reinvested with your investment amount till maturity. So, over time, your investment amount in an SIP mutual fund is exposed to the benefits of compounding to generate exponential investment growth.
ELSS vs SIP – Comparative analysis
So, now you know that SIP and ELSS are two important terms when it is about investment in mutual funds. While an SIP is an investment mode to invest in any mutual fund including ELSS scheme, ELSS is a kind of equity mutual fund. Here’s a tabular representation showing the difference between both the two.
|Investment route||Yes. An SIP is a mode to invest in mutual funds.||No. This is a financial investment plan, and you can invest in it through an SIP.|
|Tax deduction||The SIP route does not provide the benefit of tax deduction. However, if you invest in any ELSS scheme through the SIP mode, you will qualify for a tax deduction of up to Rs 1.50 lakh per year as per Section 80 C.||Yes. But you must stay invested till the lock-in period of 3 years to gain tax benefits.|
|Lock-in period||No lock-in period if not investing your funds in ELSS||3 years|
ELSS is an investment scheme, whereas an SIP is not. An SIP is a mode to invest in different mutual funds including ELSS. Thus, to strike an apple-to-apple comparison in this case is not possible because ELSS is a different financial instrument than an SIP with mutual fund being the only common link.