WHAT IS THE MAJOR DIFFERENCE BETWEEN ELSS AND SIP?
Mutual fund investments have always successfully proven to be one of the most sought-after investment opportunities when it comes to producing alternative sources of income. By beating the escalating rate of inflation, mutual funds have been successful in accruing wealth over the years. This makes them the ideal and often the first choice for those looking for investment avenues.
Investors naïve or new to the world of investing might scratch their heads over two viral but confusing terms in mutual funds – Systematic Investment Plan (SIP) and Equity Linked Savings Scheme (ELSS). While ELSS funds are a vehicle to invest in mutual funds, SIP is the method in which this investment can be made.Let’s understand the differences between the two.
What is SIP?
SIP is a method of investing in mutual funds. Under this method, you invest a pre-determined amount at fixed intervals into your desired mutual fund schemes. SIP investment instilsfinancial discipline and helps you accumulate wealth over time through a planned investment approach and with the help of powerful concepts – Power of compounding and Rupee cost averaging.
What is ELSS?
ELSS is a type of mutual fund that invests at least 80% of their corpus in equity and equity-related securities. These tax saver mutual funds offer significantly higher returns over time. They are also accompaniedby a lock-in period of 3 years. Investors can claim tax benefits up to Rs.1.5 lakh by investing in ELSS funds. An investor investing in ELSS mutual funds can save up to Rs46,800 each year.
SIP vs ELSS
| Parameter | SIP | ELSS |
| Define | SIP is a way to invest in mutual funds | ELSS is a type of mutual fund |
| Where do they invest | SIP can of any type of security | ELSS funds invest the majority of their corpus in equity and equity-related securities. |
| Tax benefit | Depending on the type of investment, tax deductions may vary | ELSS offers tax benefits to investors up to Rs1.5 lakh |
| Lock-in period | SIPs do not have any lock-in period, provided they are not invested in ELSS | ELSS funds have a lock-in period of 3 years |
| Ability to switch | Switching is possible at any time if not invested in ELSS | Cannot switch before the lock-in period has ended |
SIP cannot be compared with ELSS as it’s not an apple to apple comparison. However, you can combine the features of SIP and ELSS and make the most of mutual fund benefits. Think of ELSS as a product and SIP as a process. When you combine these two parameters, you get a perfect solution. So invest in ELSS via SIP to gain significant returns while saving tax and enjoying the benefits of rupee cost averaging and power of compounding. You can also use an SIP calculator to gauge the amount required to invest in mutual funds online to generate your aimed wealth over time. Happy investing!
