SIP Vs Lumpsum: Choosing the Best Suitor for ELSS Investment

Summary:

Equities are inherently volatile in nature, hence various tools, strategies and schemes have been designed to invest as safely as possible. However safety is not everyone’s priority. There are various investors seeking higher returns and they are willing to take risks. SIPs and Lumpsum are two investment options catering to the contrasting needs of investors.

The booming stock market in India and extensive government led awareness campaigns and financial literacy initiatives have augmented the growing fandom of SIP. It stands for systematic investment plan (SIP) and is gaining substantial popularity in India. In this blog we will uncover the difference between SIP and lumpsum, understanding the key differentiators. We will also look at the lumpsum and SIP calculator. By the end of this blog, you will be able to determine which is best for your ELSS investment. But first, let’s understand what an ELSS investment is.

Definition of ELSS investment

An equity linked savings scheme (ELSS) is tax-saving mutual fund scheme that helps you save taxes and generate reasonable income at the same time. According to the Securities & Exchange Board of Inia (SEBI), a minimum of 80% of the assets within the ELSS mutual fund must go into equity. Meanwhile, a portion of the underlying assets can be secured into low risk fixed income securities like government bonds to balance out the portfolio.

ELSS funds have a lock-in period of 3 years, the lowest among all other tax saving instruments like public provident fund (PPFs) and fixed deposit (FDs). However, it is essential to note that there is no way to redeem your units within the lock-in period. Also, there is a high risk involved from the volatile nature of equities and may not be best suited for the risk-averse investors. Having said that, the potential for significant capital appreciation over time and thus make a good choice if you have access to long-term investment horizon. Now the question is which way to go, SIP or lumpsum.

SIP Vs Lumpsum: Understanding the differences

Getting a thorough overview of the key differences in SIP and lumpsum -

Differentials	Systematic investment plan (SIP)	Lumpsum
Definition	A strategic plan to invest a set amount of money at regular intervals (weekly, monthly or quarterly) in mutual funds. This amount is automatically deducted from the investors based on the interval selected.	Lumpsum investments refers to one-time payment made at the start of the investment period. This is the case when investors choose to invest all the money available in mutual funds or another instrument.
Advantages	Disciplined approach avoids impulsive decision making to market conditions, preventing heavy losses. Investors gains more units of mutual funds during market downfall and less units if market goes up. In the long term, this limits the average cost per unit. Investors can give auto-debit instructions and automate instalment deduction, making SIPs hassle-free. Excellent tool for the newbies who want to test mutual fund investment with a small amount.	Lumpsump means investing large amounts of money, meaning you have greater chances at earning higher returns. You can take advantage of market changes to gain more profits when the conditions are favorable. There are no time constraints in this investment, you can invest whenever you want and often withdraw as and when you want.
Disadvantages	You have limited control since the investments cannot be timed with the market and must stick to the regular schedules (weekly, monthly or quarterly). You cannot leverage market fluctuations and invest large amounts of money when the market conditions are favorable, prohibiting you from making more money.	These investments rely heavily on market timing. If you get the timing wrong, you can incur substantial losses. These investments, unlike SIP, are harder to manage as they ask investors to make a one-time decision about the amount of money they want to invest and timing.
Lumpsum and SIP calculator	Involves monthly investment amount, expected return rate and the tenure. Check out Upstox SIP calculator	Involves total investment, duration of investment and expected return rate.Check out Upstox lumpsum calculator

Choosing between SIP and Lumpsum: What is better for you?

Both SIP and lumpsum investments can be very useful tools. However, when you want to invest, how and how much you want to invest will determine which type of investment will work the best for you.

• Investment horizon: SIPs go best with long-term investment horizons whereas lumpsum is ideal for short-term investment horizons.
• Financial goals: If you have long-term financial goals, SIP is the way to go. Conversely, if your investment goal is short-term, lumpsump will be the better option.
• Returns: Consistent investment allows SIPs to perform well when the market conditions are unfavourable. Meanwhile lumpsum investments in ELSS can provide higher returns when the market is stable or goes up.
• Risk appetite: SIPs are ideal for risk-averse investors as it is a disciplined investment approach. While, lumpsum investments are great if you have a high-risk appetite.
• Lock-in period: SIPs are locked in for 3 years and then mature one by one. So you have to be patient. Lumpsum on the other hand after 3 years matures all at once.

To sum it up

In conclusion, the choice between SIP and lumpsum investment in ELSS (depends on various factors, including an investor's financial goals, risk tolerance, and market conditions. Both SIP and lumpsum have their advantages and drawbacks. Choose wisely to ensure your investment is well guarded from potential losses. Young investors, who often prefer investing small can use SIP as a tool to start practicing mutual funds.

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Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.