Equity Linked Savings Scheme is a typical mutual fund scheme that offers excellent tax benefits under Section 80C of the Income Tax Act. The ELSS investment funds have a lock-in period of three years, and you can easily invest in them either through SIP or lumpsum.
Choosing between lump sum and SIP investments requires you to determine certain factors. Some of the most common ones include your investment goals, risk appetite, market conditions, and investment horizon.
This article will give you informative insights into the pros and cons of investing in ELSS through a lump sum and SIP mode. Keep reading until to know more and make an informed decision.
What is Lumpsum Investment in ELSS?
A lump sum investment in ELSS is nothing but a one-time investment with the whole investment made in one go. This investment instrument is an ideal option for those who are willing to invest a substantial amount.
Here, we have listed a few pros and cons of lump sum investment for you to have a better understanding:
Convenient Investment Option
Lump Sum investments are a single-time procedure and are truly convenient for those who can’t monitor their investments regularly. Investors who have a lump sum amount and want to invest in ELSS can make the investment and then focus on their other activities.
Lumpsum investments are capable of providing higher returns in comparison to SIP investments. It’s because the entire amount is invested in one go, and the investment gets sufficient time to grow. And fortunately, if the market performs well during the investment horizon, you might earn higher returns than a SIP investor.
This investment instrument is more susceptible to market volatility as the entire investment is made in one go. Therefore, you should have a high-risk tolerance to invest in a lump sum mode. However, if you aren’t comfortable with market volatility, you should avoid this kind of investment.
A lump sum investment can potentially expose you to timing risks. If the market is at its peak while you invest, the returns might be considerably lower than expected. In contrast, if you invest when the market is at its bottom, your returns will likely be higher. Thus, it’s immensely crucial to time your investments very carefully.
What is SIP Investment in ELSS?
A SIP investment in ELSS is another method where you must invest a fixed amount at regular intervals. This investment instrument is highly suitable for those investors who wish to invest regularly in smaller amounts.
Here are a few advantages and disadvantages of investing in ELSS through SIP mode:
Disciplined Investment Option
SIP investment in ELSS helps in building a disciplined investment habit. Besides, investing a small amount regularly is much easier than a large amount in one go. SIP investments also help in avoiding the temptation to time the market.
Regardless of market conditions, you need to invest a fixed amount at regular intervals for SIP investment in ELSS. Thus, it leads to rupee-cost averaging, where you can purchase more units when the market is low and vice versa. And this typically results in a lower average cost of acquisition and potentially higher returns.
This investment option demands regular monitoring and might not be ideal for you if you’re busy with work. Besides, you might not be flexible enough to invest more money in the scheme, as the amount is pre-decided.
SIP investment might provide lower returns in comparison to the lump sum investment, especially in a rising market. It’s because, as a potential investor, you will not miss out on any opportunity to invest the entire amount at a much lower price.
What Should You Choose?
The ultimate decision to choose between SIP and lump sum investment in ELSS will entirely depend upon your investment goals, risk appetite, investment horizon, and market conditions. Before choosing your desired investment instrument, you should carefully evaluate these factors, as mentioned earlier and make an informed decision.
Both lump sum and SIP mutual fund investment comes with their own advantages. It’s mainly because they are highly suitable for several investors in different circumstances.
Now that you are aware of the differences between SIP and lumpsum, you will be able to choose your ideal investment instrument. Also, it is advised to start investing early so that you can benefit in the long run.
To earn a remarkable return on investments, you can choose Edelweiss SIP. Apart from providing you with great ROI, it will also align seamlessly with your financial objectives.