What is the difference between SIP and ELSS? Which is the most preferred to get high returns on a monthly investment of 3K-5K?
SIP (systematic investment plan) and ELSS (equity-linked savings scheme) are the two common terms you will come across when beginning your mutual fund investment. Thus, it is no surprise that you may try to compare them. However, you cannot compare them.
ELSS is a kind of tax-saving equity mutual fund while SIP is one of the modes of systematically investing a small amount in mutual funds. Instead of comparing them, let’s assess the features and concepts of both.
What is an SIP?
You can invest in mutual funds in two ways – lump sum and SIP mode. Making a lumpsum investment means investing a huge amount in one shot in a mutual fund scheme depending upon the market movement. In contrast, when you select the SIP mode, you invest a specific amount periodically in the mutual fund scheme of your choice.
By selecting the SIP mode, you stagger your investments across different market cycles over time, which provides you with the benefit of rupee cost averaging and compounding. Also, this mode helps inculcate investment discipline and habits. You can begin your SIP investment with an amount as low as Rs 100 per month.
Note that an SIP even provides you with the flexibility of choosing the investment intervals. So, if you do not want to invest through an SIP in a mutual fund monthly, then you can consider investing every week, quarterly or six-monthly.
What is ELSS?
ELSS is an equity mutual fund that offers tax saving benefits under Section 80C for up to Rs 1.50 lakh. Owing to its market-linked nature, you generate a higher return than fixed deposits or any small savings investment scheme. Also, this financial option comes with the shortest lock-in period as compared to all tax-saving financial investments i.e., three years. So, ELSS investment can earn you an inflation-beating return while providing you with tax benefits.
Which option is better – SIP or ELSS?
By now, it must be clear that it is not fair for you to compare both products as ELSS is a mutual fund type while an SIP is a mode through which you invest in a mutual fund. In fact, simultaneously, you can take the benefit of both by investing in the ELSS scheme through the SIP mode. So, if you have any financial goal to attain within a specific time period, then you can take the help of an online SIP calculator to compute the monthly contributions you must make to attain the corpus.
For instance, suppose you want to generate a corpus of Rs 14.16 lakh by investing in ELSS through the SIP mode. To attain this corpus, you just need to invest a monthly SIP amount of Rs 3,000 for a duration of 14 years at an expected rate of return of 13 per cent per annum. Note that instead of contributing Rs 3,000 if you contribute an amount of Rs 5,000 per month for a span of 11 years at the same return rate, then you would reach your corpus goal faster.
So, with SIP mode of investment in ELSS fund, you can reach your corpus goal on time with smaller contributions without the need for waiting for long to accumulate a huge amount to start with your market investment.
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