Mutual Fund Equity Linked Savings Schemes (ELSS) or ELSS Mutual Funds are one of the best investments for tax savings (under Section 80C of Income Tax Act) and wealth creation in the long term. ELSS Funds are essentially diversified equity mutual fund schemes which invest in a portfolio of stocks across different sectors and market capitalization segments with the objective of generating capital appreciation for investors over a sufficiently long investment horizon.
Investors can save up to Rs 46,350 in income tax every year by investing annually up to Rs 150,000 in Equity Linked Savings schemes or ELSS Mutual Funds. Investors can invest in ELSS Funds either in lump sum or through Systematic Investment Plans (SIPs). Investors can also invest in ELSS through Systematic Transfer Plans (STP) from other mutual fund schemes (e.g. liquid funds, income funds etc). Investors should note that, ELSS investments have a lock-in period of three years; investors cannot redeem their ELSS investments (fully or partially) before three years from the date of their investment. So if you are investing in ELSS through SIP or STP, each SIP / STP instalment will be locked-in for three years.
Suggested reading: Benefits of investing in Equity Linked Savings Schemes
One question, which many investors grapple with regards to ELSS investment, is whether to invest in lump sum or SIP. The answer is not straightforward. Lump sum and SIP are very different investment modes; there are pros and cons of each, especially with regards to ELSS investments, which investors must consider.
Though there is a lot of debate on the merits and demerits of lump sum versus SIP, comparing lump sum and SIP is like comparing apples and oranges. In the context of tax saving investments, the most basic condition of investing in lump sum is the availability of funds. For example, if you want to make Rs 1.5 lakhs of tax saving investment in lump sum in a financial year, you should have Rs 1.5 lakhs in your bank account to make the investment. If you are reliant on your regular monthly savings to make your investments, then you can invest in SIP or wait till you accumulate sufficient amount in your bank account to invest in lump sum.
Let us now understand the financial implications of investing in lump sum versus SIP. Let us assume that you want to invest Rs 1.5 lakhs in ELSS Mutual Funds for tax saving. Let us further assume that you have Rs 1.5 lakhs at the beginning of the financial year, which you can invest in lump sum in ELSS. Assuming a 15% rate of return from ELSS, the investment value of your ELSS at the end of the financial year could be around Rs 1.7 lakhs. If you invested Rs 1.5 lakhs in ELSS throughout the year through monthly SIP of Rs 12,500, the investment value of your ELSS at the end of the financial year could be around Rs 1.6 lakhs. So in this case, lump sum is a no brainer. Why was lump sum able to give a higher return compared to SIP? A bigger sum of money was committed for a longer period of time in the case of lump sum, whereas in the case of SIP, smaller amounts were committed every month.
Check the lump sum return of ELSS mutual fund – Lump sum returns of ELSS Funds in the last 5 years
Let us examine the scenario, where you did not have sufficient funds in your bank to make your tax planning investment for the year. Let us assume, you accumulated enough funds for making the tax saving investment for the year only in the month of January of that financial year and only then you make your lump sum investment in ELSS. In such a scenario, the investment value of your ELSS at the end of the financial year will be Rs 1.55 lakhs. You can see that, SIP in ELSS is better, given such a scenario.
One of the biggest advantages of investment through SIP is that, investors can take advantage of volatility in stock markets through Rupee Cost Averaging. Rupee cost averaging works both ways; on one hand, it can reduce the average purchase price of units in market downturns, on the other hand, it can increase the average purchase price in market rallies.
Check the SIP returns of ELSS mutual fund – SIP return of ELSS Mutual Funds in the last 5 years
The other argument in the lump sum versus SIP debate in the context of ELSS investment is that, 80C investments need to be made every year for the purpose of tax savings. So, even if you are investing in lump sum at the beginning of the year, every year, you will be making tax saving investments at different price points. So in that sense, you will be averaging out the price of purchase, over a long period of time, for your tax saving investments made every year.
Finally, let us discuss whether you should invest through STP, even if you have lump sum funds to invest at the beginning of the financial year. No one can predict how the market will behave in the short term (over the next few months). However, in certain years, when we see a big correction from bull market tops and there are concerns about the global economy, one can expect a period of volatility. We saw a situation like in 2015, but these situations are very difficult to predict. If you expect volatility in the short term, you can invest in lump sum in a low risk fund, like a liquid fund or ultra-short term debt fund and transfer through STP to your ELSS Mutual funds.
In summary, the lump sum versus SIP decision in ELSS Funds will depend on your financial situation as discussed here. If you have sufficient funds to invest in lump sum at the start of the financial year, it makes more sense to invest in lump sum, if you have a long investment horizon (anyway, your investment is locked in for three years). On the other hand, if you depend on your monthly savings to make your tax planning (u/s 80C) investments, which is likely to be the case for many investors, SIP is the best investment option for investing in ELSS Mutual Funds.
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