The main difference between SIP and ELSS is that SIP is a method to invest in mutual funds wherein you can make small and regular installments every week, month, quarter, or half-year whereas ELSS is a type of equity mutual fund that helps in saving yearly taxes under Section 80C of the Income Tax Act, 1961 and comes with a lock-in period of three years. An investor can choose to invest in an ELSS scheme with the lump sum or SIP method.


What is SIP?

SIP (Systematic Investment Plan) is the investment option through which you can invest in mutual funds in regular installments, which can be made weekly, monthly, quarterly, or semi-annually. 

You will get the units of a selected mutual fund at the current NAV (net asset value) which is declared by every fund house at the end of the working day. All you have to do is to give the mandate to authorize the SIP to your bank account linked to your Demat account which will automatically deduct the pre-decided amount on the installment date and add the units of a mutual fund into your Demat account.

With this approach, your mutual fund units fluctuate based on periodic NAV changes. Thus, you acquire more units when the NAV is low and fewer when it’s high. Despite these variations, long-term SIP investments leverage the advantages of rupee cost averaging and compounding, particularly over periods like five years.

Example of SIP: Suppose the NAV of a mutual fund is ₹10, and the installment amount is ₹500 which is paid on the 1st of every month. The units of a mutual fund you get in the first month will be 50. In the next month, if the NAV falls to ₹9 you will get 55.55 units of the mutual fund. 

ELSS Funds Meaning

ELSS (Equity Linked Savings Scheme) is a type of equity mutual funds scheme that provides tax saving benefits on the invested amount up to ₹1.5 lakhs in a financial year under Section 80C of the Income Tax Act, 1961. This fund invests at least 80% of its collected corpus from various investors into equity and related instruments. 

This fund mainly invests in large-cap stocks, which are the stocks of the top 100 companies listed on the stock exchange, and the remaining corpus will be invested in mid-cap and small-cap stocks. This will help with long-term capital appreciation over the invested period. The fund manager is free to invest between the stocks of different industries with the view to balance the risk and returns ratio for the investors. 

ELSS funds carry a lock-in period of three years; you can invest in them through the SIP method or with a lump sum method. It is best to stay invested for a long period such as for five years as they invest in equity stocks which provide better returns in this period. 

Example of ELSS: Suppose you are investing in an ELSS fund with a monthly SIP of ₹12,500 for three years, which can provide an average return of 12%. Then, the total invested amount will be ₹4,50,000, the estimated returns will be ₹93,846, and the total wealth accumulated will be ₹5,43,846. 

Difference between ELSS and SIP

The difference between ELSS and SIP is that ELSS allows investors to save on yearly tax up to ₹1.5 lakhs while SIP helps investors invest in mutual funds with small installments with amounts as low as ₹500. 

SIP vs ELSS: Meaning 

SIP is an investment method through which you can invest in mutual funds in weekly, monthly, quarterly, or semi-annual installments, whereas ELSS is the type of equity mutual fund that invests the total collected corpus into 80% of the equity stocks and related instruments. You can invest in ELSS with both the SIP and lump sum methods of investments. 

SIP vs ELSS: Lock-in Period

SIP does not have a lock-in period as they allow the investors to invest in open-ended schemes which can be redeemed anytime at the current NAV, whereas ELSS has a lock-in period of three years which means you cannot redeem your investments until the lock-in period ends. 

SIP vs ELSS: Tax Exemption

SIP does not provide any tax exemption until and unless you invest in an ELSS scheme that provides a tax exemption of up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961. Also, ELSS provides better post-tax returns as the LTCG (long-term capital gains) is taxed at a rate of 10% if the earnings are more than ₹1 lakh. 

SIP vs ELSS: Minimum and Maximum Amount

With SIP, the minimum investment amount can be ₹100 or ₹500, but it depends on the fund house. There is no limit on the maximum amount you can invest with SIP. In an ELSS fund, the minimum amount you can invest every year is ₹500, and there is no limit on the maximum amount you can invest. 

SIP vs ELSS: Switching

With SIP, you can switch between different types of mutual funds by activating the option of STP (Systematic Transfer Plan). Sometimes, you must pay the exit load when switching between schemes. With ELSS, you cannot switch your investment within the same investment, and it can only be done by redeeming one and investing in another as a new investment. 

SIP vs ELSS: Redemption

In SIP, you can withdraw your investment in mutual funds partially using systematic withdrawal plans or fully by selling them back to the fund house or AMC at the current NAV. ELSS investment can be redeemed after three years of investment, and with SIP, the redemption process becomes tricky because each unit of allotment will be treated as a new investment. Therefore each will have a different lock-in period. 

SIP vs ELSS: Pause

SIP investments in mutual funds offer flexibility—you can halt or resume them anytime. In ELSS via SIP, pausing investment is possible with a bank and fund house mandate. However, even if installments stop, redemption remains unavailable before three years of purchase.

SIP vs ELSS: Change in Amount

In SIP, you can change the installment amount at any time, which means you can decrease or increase it based on your analysis. ELSS helps you change the installment amount if you invest with SIP like any other mutual funds investment. 

SIP vs ELSS: Lower Average Cost

SIP provides the benefits of lower average cost with the total investment in a scheme and with the fluctuating NAV. You will benefit from rupee cost averaging when investing in ELSS through the SIP. But with the lump sum method, there is no such benefit that you can get as the total amount is invested at a point in time. 

SIP vs ELSS: Compounding Effects

SIP works in a way that creates compounding effects on the initial investment. It means that you will earn the returns on both the earnings you get and the installment amount you pay to the mutual fund house. ELSS works in long-term investing and provides compounding benefits to investors. 

SIP vs ELSS: Returns

The returns provided by SIP are not fixed and are totally dependent on which type of fund it is. ELSS funds can provide average returns of 12% to 15% over three years. But they do not provide guaranteed returns, as the returns are totally dependent on the performance of the underlying equity and related instruments. 

SIP vs ELSS: Risk

SIP investment in mutual funds will carry risk, depending on the type of mutual fund. The equity fund will carry a higher risk level than the debt finds and hybrid funds. As ELSS funds are a type of equity mutual fund scheme, they carry all the risks that any equity fund has, such as market risk, concentration risk, etc. 

SIP vs ELSS: Ideal for Investors

SIP is ideal for investors who have different financial goals ranging from short to long-term. If you are a new investor, do not have a large amount of money, and do not have the financial knowledge to invest in stocks, then the SIP method for mutual funds is best. ELSS fund is ideal for investors looking to invest in a long-term investment scheme to save tax liabilities every year.

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SIP vs ELSS – Quick Summary

  • The key difference between SIP and ELSS is that SIP is an investment mode to invest in mutual funds while ELSS is a tax-saving equity mutual fund.
  • SIP is an investment mode to invest in mutual funds through the regular installment with an amount as low as ₹500.
  • ELSS is an open-ended equity mutual fund that provides the benefits of tax savings on the invested amount and has a lock-in period of 3 years.
  • SIP does not provide tax-saving benefits in mutual funds except if it is done in ELSS funds. 
  • SIP investment can be redeemed anytime, while the ELSS fund can be redeemed only when the lock-in period ends. 

Frequently Asked Questions

1. What are the differences between ELSS and SIP?

The difference between ELSS and SIP is that ELSS is an equity-linked tax saving scheme while SIP is the investment option to invest in mutual funds in installments, including ELSS funds.

2. Is SIP better than ELSS?

SIP is better than ELSS when the market is fluctuating as it provides the benefits of rupee cost averaging over time. However, this benefit can also be availed in ELSS investment through SIP. 

3. Is SIP allowed in ELSS?

Yes, SIP is allowed in ELSS because it is a type of investment mode that can help investors invest in any mutual fund with small and regular installments. 

4. What is the downside of ELSS?

The downside of ELSS is that it does not provide guaranteed returns and does not have the liquidity to redeem the investment in the lock-in period.

Click the link to access the web story now: Difference Between Sip and ELSS.

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