You can choose between SIP and lump sum investments in ELSS depending on when and why you plan to invest. Your only option for tax-saving investments after the fiscal year is lumpsum investing. However, if you are investing at the start of the fiscal year, you have the option of making a lump sum investment. ELSS has the growing potential of stocks while also providing tax advantages.
The lock-in period for ELSS or tax-saving funds is three years. Your investment is redeemed all at once with a lump sum payment three years following purchase. For instance, your money will be invested till March 31, 2022, if you invest Rs. 1.5 lakh in an ELSS on March 31, 2019. Your options are to either keep them all or sell them all. On the other hand, your SIP investments will mature individually, every month, starting on March 31, 2022. You might not be able to access all of your investments until March 31, 2023.
One-time investments for mutual fund programs are advantageous to people. However, SIPs offer lower total returns when considering the investor’s capacity for making consistent nominal investments.
Benefits of ELSS Funds
There are two advantages to purchasing ELSS through a SIP. First, you minimize the risk by spreading your investments over the year. Due to rupee cost averaging, investing over the year at various NAVs will result in a higher average cost for your units than all at once. Thirdly, compared to a lump sum investment, monthly investments made in little quantities don’t put a strain on your finances. However, you must ensure that the overall sum invested during the year equals the amount you intend to set aside for ELSS.
If you invest in ELSS funds today, you won’t be able to withdraw your money until 3 years from now if you made a lump sum investment because ELSS funds have a 3-year lock-in period. Each SIP payment is also subject to the lock-in term. You must wait until the final SIPinstallment has finished three years if you wish to withdraw the entire money invested over 12 months.
The ideal method to maximize profits is to make staggered ELSS investments starting at the start of the fiscal year. It teaches financial discipline as well.
An investor may gain substantial tax savings under Section 80C of the Income Tax Act by making a lumpsum investment at the start of the fiscal year. This benefit is up to Rs. 1.5 lakh from the taxable amount can be reported on the investor’s income tax return. Long-term ELSS investments also offer better returns.
Spending the entire Section 80C tax deduction advantage of Rs is advisable. 1.5 lakh in tax-saving investments at the beginning of the fiscal year if you have the lump sum investment at your disposal. As a result of your money being invested for a more extended period, you can expect larger returns on your investments. Additionally, you are not required to make a hasty investment choice at the end of the year.
Lump sum investments are the best type of investment for business owners with cyclical sources of income. If not, they might consider making lump sum and SIP investments based on their income cash flows. By doing this, they can avoid experiencing financial stress while investing.
There are guidelines for investing in mutual fund schemes using a lump sum payment or a systematic investment plan. Before investing in either of the options, as an investor, you would carefully consider your return expectations. You can maximize your ability to benefit from Section 80C tax benefits by selecting ELSS. Lumpsum investments would be better if you invest near the conclusion of a fiscal year or have larger risk tolerance.
Also Read: Students: How to Start Investing