Last Updated on May 25, 2022 by Neera Bhardwaj

ELSS stands for Equity Linked Savings Scheme, a kind of mutual fund that invests a large percentage of its portfolio in a mix of equity and equity-related securities. A systematic investment plan (SIP), meanwhile, is a way of investing in a mutual fund that allows you to start investments with a small amount of money and grow it into a corpus through regular periodic investing.

ELSS and SIP are two concepts that may not be compared head to head as there are no similar grounds for comparison. One is an investment product, and the other is an investment mode. This article delves into the key features of ELSS and SIP and the working systems of both concepts.

What is ELSS and how does it work?

Equity-linked savings schemes or ELSS are mutual fund schemes that invest a minimum of 65% of its portfolio in well-diversified equity instruments. They are essentially equity-based schemes; therefore, they carry higher risk due to volatility. Thus, returns from ELSS are market performance-based. 

ELSS comes with a mandatory lock-in period of three years. Investors can not withdraw the funds before the lock-in period of three years is completed. One may however remain invested in an ELSS fund long after the lock-in period ends to continue accumulating interest and adding to the corpus. 

The attraction for ELSS schemes comes from the fact that they provide equity exposure (market-linked returns) with benefits like debt instruments. ELSS schemes are renowned as the investment for tax savings with the lowest investing tenor. Investors can take advantage of deductions up to Rs 1.5 lakh on the invested amount from their annual taxable income under Section 80C, Income Tax Act, 1961.

The income earned from ELSS investment is treated as a long-term capital gain that attracts taxes at 10% above Rs 1 lakh.

Who can invest in an ELSS?

  • An investor with a long-term horizon who does not require their funds in the near term 
  • An investor with a high-risk profile as the returns are market-linked
  • An investor looking for tax-saving investment can give a place to ELSS in their investing portfolio

How to invest in an ELSS?

You can invest in ELSS funds as a lump sum or through a systematic investment plan (SIP). 

ELSS schemes can be subscribed to online or offline, directly through the fund house or through a broker or authorized dealer. You may purchase using your demat account too.

What is a SIP and how does SIP work?

SIP is a disciplined approach to investments that allows an investor to take advantage of the compounding power of money. A predetermined amount is invested in a fund of the investor’s choice on a predetermined date on a regular basis, irrespective of what level the market is at or what direction it is trending in. For example, an investor may choose to invest Rs 1,000 in the ABC fund on the 5th of every month for a 5-year period. On the 5th, irrespective of whether the market is up or down, Rs 1,000 will be auto-debited from the investor’s account and units equivalent to the amount will get credited into the investment portfolio.

This helps with averaging out the short-term volatility in the market and also enables the investor to take advantage of rupee cost averaging where the cost of investment averages out in the longer term, generally making it a better way to invest than lump sum investments. SIPs can be weekly, monthly, quarterly, half-yearly or yearly as per the investor’s choice.

What is ELSS SIP?

When you invest in an ELSS fund via SIP, it is simply ELSS SIP.

Setting up an ELSS SIP may be a smart move because it may help with Section 80C tax planning forever! We mean it. Take a look at this scenario:

You can invest up to Rs 1.5 lakh for tax savings under Section 80C. ELSS schemes allow the full amount to be claimed. Suppose you set up a SIP for Rs 12,500 every month, this entire amount can be claimed. 

You would not have to struggle with a large payment at the end of the year or figure out the best investment to help you save tax at the last minute.

Alternatively, should you have life insurance or PPF or other tax-saving investments already running, simply deduct that amount from Rs 1.5 lakh and set up your SIP for a smaller amount on a monthly, weekly, or daily basis.

What you need to consider with ELSS SIP

If you choose ELSS SIP, the fund will lock each investment for three years. In other words, you can get the SIP amount at different points in time. For example, you bought the units in the fund on 1st Jun 2019 via SIP. Your investment has a redemption date of 1st Jun 2022, i.e., on completion of the SIP. The same system follows for each of the next SIPs. Thus, you can withdraw the entire amount only after your last SIP completes three years.

Who can invest in SIP?

  • An investor with small savings but looking for a compounding advantage can invest in funds through SIP. For example, if you are investing Rs 5,000 monthly. Over 10 yrs, at a return of 12%, it can give you Rs 11.50 lakh with the power of compounding. 
  • An early stage investor can consider SIPs to grow wealth over time.
  • An investor looking to build financial discipline. SIP is an effective way to be a disciplined investor as you require to invest regularly.

How to invest in SIP?

You may have understood all aspects of ELSS and SIP, including ELSS vs SIP. Let us define how you can invest via SIP. Determine your financial goals and identify your financial status. Plan to achieve them through SIP if you do not have access to a large corpus of funds.

Ascertain the SIP amount required to achieve your goals and investment horizon, and then identify the scheme(s) as per your risk profile. You may subscribe to a SIP in any mutual fund of your choice and you also have the flexibility to determine the amount, the duration of investment and the date on which your investment will happen.

ELSS is a financial product, and SIP is a process. You can combine these two concepts and take advantage of rupee cost averaging and tax-saving in the long run. Click To Tweet

Key differences between ELSS and SIP

Following are the points to show SIP vs ELSS – the difference between SIP and ELSS:

SIPELSS
It is the mode of investing in an investment vehicleIt is an investment vehicle in itself.
SIP investments can be made in any fund and the rules of that fund apply.The lock-in period is three years. Redemption however is not compulsory upon maturity 
Advantage of deductions from taxable income apply only with SIPs for ELSS mutual funds.It is a tax-saving scheme under Section 80C.
SIP can involve any type of security depending on the type of the mutual fund.ELSS involves equity and equity-related vehicles only.
SIPs make you disciplined in investing.The requirement of discipline in ELSS depends on the method you choose for investment.

ELSS is a financial product, and SIP is a process. You can combine these two concepts and take advantage of rupee cost averaging and tax-saving in the long run. You can diversify your investments through multiple SIPs in different mutual funds based on your financial goals, risk profile, and the timeline for investments.