When investing in mutual funds, you will come across options like Systematic Investment Plans (SIPs) and Equity-Linked Savings Scheme (ELSS). To build an investment portfolio that aligns with your financial goals, it’s essential to understand these options.
SIPs help you invest a fixed amount in a mutual fund scheme regularly. They are a popular mode of investment in mutual funds that help you practice efficient goal-based investing.
ELSS funds, on the other hand, are a type of equity mutual fund that invest 80% of their total assets in equity and equity-related instruments. ELSS tax saving investments have a three-year-long lock-in period and help you save tax under section 80 C of the Income Tax Act.
5 Major Differences between ELSS and SIP investments
You can refer to the following table to understand the difference between ELSS and SIP investments:
| Sr. No. | Difference | ELSS | SIP |
| 1. | What is it? | ELSS investments are a sub-category of equity investments that leverage Section 80C of the Income Tax Act, 1961, to help you save tax on your mutual fund investments. | SIP is a mode of investing in mutual fund schemes. You can choose to invest a fixed amount regularly in a mutual fund via SIP. You can also increase your regular contributions by choosing the SIP top-up option. |
| 2. | Can you modify your investment? | In a very limited fashion. You cannot modify it before three years after the date of investment. | Yes. You can modify your SIP investment at any time. Most fund houses allow at least two free switches between funds per year. |
| 3. | How is the liquidity? | ELSS tax-saving funds do not allow any withdrawals before their fixed three-year period. | SIP investments offer higher liquidity to investors. |
| 4. | How are the tax benefits? | You can save up to ₹46,800 in taxes by investing an annual amount of ₹1,50,000 in ELSS mutual funds. | The tax benefits depend on the mutual fund in which you are investing via SIP. You can invest in an ELSS fund via SIP and benefit from more tax deductions. |
| 5. | Can you benefit from rupee-cost averaging? | You can, by investing in ELSS funds via SIP. | Rupee-cost averaging is one of the benefits of SIP investments. You can avail this benefit by investing in any fund via a SIP investment plan. |
Which category of fund must you invest in?
You can buy ELSS online if you wish to benefit from tax deductions by locking your investment amount for three years. However, if you wish to invest in a fund regularly over a medium-to-long term and earn consistent returns, you can choose an SIP mutual fund investment. You can also combine both options by investing in an ELSS fund via SIP.
In conclusion
You must consider your investment horizon, expected tax-related benefits, and the expected level of liquidity before deciding between an ELSS fund and an SIP investment. You can use a monthly SIP calculator to know the ideal value of your SIP investments before investing.
