ELSS vs SIP: Key Differences You Need to Know

Published on November 21, 2023 | 5 min read

Key Takeaways

ELSS is a type of mutual fund that primarily invests in equity markets to generate returns and offer tax benefits under Section 80C of the Income Tax Act, 1961.
SIP is an investment method that allows investors to pay a small, fixed amount regularly towards their mutual funds of their choice.
ELSS mutual fund investments are eligible for tax deductions of up to ₹1.5 lakh under the old tax regime, and are regarded as ideal for investors seeking tax-saving and equity-linked investments.
SIP investment approach is ideal for beginners and seasoned investors seeking a flexible and affordable investment approach.

When discussing mutual funds, most people are confused between ELSS and SIP. ELSS is a type of mutual fund that offers tax-saving benefits, while SIP is an investment approach that allows investors to contribute a small, fixed amount towards a mutual fund of their choice.

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Let’s understand ELSS and SIP in detail and the difference between them.

What Is ELSS in Mutual Funds?

ELSS is a mutual fund that offers tax benefits and equity-linked returns. ELSS has a lock-in period of three years, which is the lowest among tax-saving investments. Investors can choose to invest in ELSS funds via lump-sum investment or SIP (Systematic Investment Plan).

After completing the lock-in period, investors can continue to invest, hold or redeem their ELSS investments.

Under Section 80C of the old tax regime, contributions towards ELSS mutual funds are eligible for tax deductions of up to ₹1.5 lakh.

What Is SIP in Mutual Funds?

SIP in mutual funds is an investment approach that allows investors to pay a small, fixed amount of money towards a mutual fund. When you pay through an SIP, you buy mutual fund units at the prevailing NAV (Net Asset Value).

SIPs allow investors to average their purchase price and can reduce the impact of market fluctuations by buying more units when the prices are lower.

Key Differences Between SIP and ELSS

Let’s explore the difference between SIP and ELSS in mutual funds.

Feature	Equity Linked Savings Scheme (ELSS)	Systematic Investment Plan (SIP)
Category Type	A specific type/category of mutual fund scheme focused on equity investments with tax-saving benefits.	An investment method/approach to invest periodically in any mutual fund scheme.
Lock-in Period	Mandatory 3-year lock-in period (the shortest among Section 80C options).	No inherent lock-in period, depending on the underlying mutual fund chosen).
Tax Benefits	Eligible for tax deductions up to ₹1.5 lakh per financial year under Section 80C (Old Tax Regime).	No direct tax deduction by itself; tax treatment depends on the specific mutual fund scheme invested in.
Investment Flexibility	Can be invested in via lump-sum or through SIP.	Operates as a periodic investment mode (weekly, monthly, quarterly, etc.).
Post Lock-in Options	Investors can choose to continue holding, redeem, or switch after completing the 3-year period.	Units can generally be redeemed or stopped at any time (unless invested in a locked-in fund like ELSS).
Primary Goal	Tax saving under Section 80C along with long-term capital growth through equities.	Disciplined investing and rupee cost averaging to reduce market volatility impact.

Who Can Choose SIP?

Salaried investors and those seeking a disciplined and affordable approach to building wealth in the long term can opt for SIP and pay a fixed amount regularly. Investors can select the frequency of their SIP payments based on their financial goals and investment approach.

Who Can Choose ELSS?

Investors seeking a tax-saving investment with the lowest lock-in period should consider ELSS mutual funds. ELSS funds may not be suitable for investors who require high liquidity, as your investments are locked in for three years, during which you cannot withdraw your investments.

Before investing in ELSS funds, one should know all the associated risks to make informed investment decisions.

ELSS are tax-saving equity mutual funds, while an SIP is a method that allows investors to gradually invest fixed amounts. ELSS investments qualify for tax deductions under the old tax regime and carry a mandatory three-year lock-in period.

Investors can choose to fund an ELSS via an SIP or a lump sum, depending on their strategy. The SIP approach is ideal for individuals seeking an affordable, flexible, and disciplined way to build market-linked wealth.

FAQs

What is the difference between ELSS and SIP?

ELSS is a tax-saving mutual fund, while SIP is an investment approach to invest a fixed amount regularly in a mutual fund.

Can I invest in ELSS through SIP?

Yes, you can invest in ELSS mutual funds through a SIP and invest a fixed amount at regular intervals.

Do ELSS investments offer tax benefits?

Yes, ELSS investments are eligible for tax deductions of up to ₹1.5 lakh under Section 80C of the old tax regime.

What is the lock-in period of ELSS?

ELSS mutual funds have a mandatory lock-in period of 3 years. If you invest in an ELSS mutual fund via SIP, each SIP would have a three-year lock-in period.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.

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About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.