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ELSS VS SIP

 ELSS stands for equity linked saving scheme. It is a mutual fund scheme where the majority of the corpus is invested in equity and equity related instruments. SIP stands for systematic investment plan and it is a way of investing in mutual funds.

EQUITY LINKED SAVINGS SCHEME (ELSS)

ELSS is essentially a tax saving vehicle which people usually use at the end of the financial year. As the name suggests, at least 80% of the corpus has to be invested in equity instruments. ELSS serves as a tax saving vehicle and an investment instrument as well. Equity linked saving scheme has a lock-in period of 3 years. Other tax-saving instruments include Public Provident Fund (PPF), National Pension System (NPS), 5 years fixed deposit, and National Savings Certificate (NSC). ELSS has an upper hand over all these instruments.

· ELSS returns lie in the range of 15% – 20%. PPF, NSC, and NPS, on the other hand, give only 5% – 10% interest. If you invest in the best performing mutual funds, you can get returns which go well beyond the 20% mark. Other tax-saving instruments rarely cross the 10% mark.

· Since the lock-in period is 3 years, ELSS investments are highly liquid. Investors have the option to stay invested even after 3 years. Of all the tax saving instruments, ELSS gives the highest degree of liquidity. The lock-in period for all other instruments lies in the range of 5 – 15 years.

· ELSS gives the flexibility to invest via the online mode. In all other cases, you have to go physically to the bank to invest and redeem.

·SIP is a medium through which people can invest ELSS. The initial investment can be as low as Rs.500.

·  The investment amount in ELSS is completely free from taxes. However, the returns are partially taxable, i.e. your returns will be taxed only if the returns surpass a certain threshold. The tax rate is 10%. In case of PPF, NSC, NPS, and FD, all returns earned are liable to be taxed.

These points show that ELSS has many benefits and one of the major benefits is tax saving.

 

SYSTEMATIC INVESTMENT PLAN (SIP)

SIP is a way of investing in mutual funds. As the name suggests, Systematic Investment Plan (SIP) is a plan through which people invest a small amount regularly in a mutual fund of their choice. This investment avenue allows the investor to save towards a financial goal. SIP doesn’t affect your budget as the amount you invest totally depends on your capability and willingness. Here are some advantages and differentiating features of SIP:

·Through an SIP, an investor invests in all market conditions. The investor gets fewer units when the market is rising and gets more units when the market falls. Ultimately, the purchase cost per unit is averaged. This is called rupee cost averaging and is one of the major benefits of SIP.

·  Systematic investment of small amount gives a huge corpus at maturity. This is because the amount you invest is compounded. Through SIP, you can truly understand the power of compounding.

·   SIP inculcates a habit of saving. It disciplines the investor to invest regularly.

· Idle money doesn’t do any good to the investor. SIP is a good way to put your money to work. You can invest in a mutual fund of your choice and the amount of investment totally depends on you. An amount as low as Rs.500 can be your initial investment.

 

Both SIP and ELSS have a different set of benefits and features. The main benefit of ELSS is its tax saver function whereas, the main benefit of SIP is rupee cost averaging. ELSS is a mutual fund scheme whereas SIP is a way to invest in mutual funds. Each avenue has a modality which the people should fully understand before investing. Consult a financial advisor when in doubt. Happy investing!

 

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