A systematic Investment Plan (SIP) is a convenient investment route in mutual funds. It instils a disciplined approach in investors. When we talk about equity-linked saving schemes (ELSS), there is a lock-in period of three years, which is the shortest, compared to other tax saving investment options under section 80C of income tax.
Currently, there are 41 schemes in the ELSS category. The average return from the ELSS category in the last three years stands at 25.73 per cent compounded annually as on May 5, 2023. This is the highest return given by any other tax-saving investment product. However, one needs to keep in mind that the return from ELSS is market linked and also, the lump sum and SIP investment may not always be the same and can differ to some extent.
Time In The Market Matters, Not Timing
As nobody can time the market, the one-time or lumpsum investment carries more risk, while SIP remains a viable option for investors to save their money in a disciplined manner. But what should you consider before taking the SIP route of investing in ELSS?
Shweta Jain, founder of Investography Pvt Ltd, says, “SIP in ELSS is a great idea for anyone who is opting for taxation in the old regime as it gives them the benefit of tax saving, locking in gives them the benefit of long-term, and SIP gives them the benefit of rupee cost averaging.”
Jain adds, “If someone opts for a new tax regime, SIP in ELSS is still a good idea because it still has two of the above benefits.”
Benefit Of Rupee Cost Averaging
SIP offers an easy way to invest in ELSS and reduces the risk of market volatility. It offers rupee cost averaging to investors, which means when the market is low, you get more units, and when it is high, fewer units.
It also inculcates investment planning habits rather than making investments anywhere frantically at the end of the financial year.
Lighter On Wallet
It is a viable option for those having regular income to save in small amounts at certain intervals, ranging from monthly, quarterly, half-yearly, or yearly to utilize the tax exemption limit. It is also ideal for beginners to start with, who have no idea of the equity market, to imbibe regular saving habits and get equity exposure.
Though SIP offers many benefits to investors, particularly for SIP in ELSS, one must not forget that ELSS has a lock-in period of five years. It means that if you invest in the ELSS scheme at one go anytime in the year, your money is locked for three years from that day. For example: If you invest Rs 1,50,000 on June 01, 2023, the units will be allowed for redemption, not before June 02, 2026.
Things To Keep In Mind
In the case of investing through SIP, every instalment is considered separately to calculate the lock-in period. For example: To save Rs 1,50,000, the monthly SIP instalment will be Rs 12,500. The first SIP invested on April 01, 2023, will be available for withdrawal on April 02, 2026, whereas the last SIP on March 01, 2023, will complete its lock-in period on March 02, 2027. So, it will take four years after the first SIP instalment to redeem the total amount.
Whether you invest in ELSS through SIP or one time route, you should plan it as per your income flow and risk capacity, keeping in mind the investment and the maturity/withdrawal period,
