What is ELSS?
ELSS stands for Equity Linked Savings Scheme. ELSS is a specific category of mutual fund schemes, a type of diversified equity mutual fund having a lock-in period of 3 years. ELSS is completely tax-exempt under section 80C of the Income Tax Act. Investment in ELSS comes with a major tax-benefit as well as a tremendous potential for growth by way of equity.
What is SIP?
SIP (Systematic Investment Plan), is a method in which the investor systematically invests a certain pre-determined amount of money at regular intervals over a certain period of time. The discipline and a systematic approach that it brings to the table have made it a favourite among the various investment options.
Why is SIP better than One-Time Investment for ELSS?
SIP or Lump sum? It is one of the most frequently asked questions, before investing in ELSS Mutual Funds. As a basic rule of thumb, you should always invest at regular intervals in an equity mutual fund and not in a lump sum. Let us take a closer look at the steps involved in both of these processes and understand why SIP is better than one-time investment for ELSS:
• Rupee cost averaging: When a certain fixed amount of money is invested over a long period of time, especially in an equity fund, a considerable number of units can be bought at a low price by virtue of the fact that investments are continued even during the low phase of the stock market. Thus the average cost per unit gets reduced in the long run. This concept is called rupee-cost averaging. A smart and systematic investment approach stretched over a long period of time can compensate for fluctuations in the market and alleviate the element of risk involved in volatile-market investments. Investments via SIP even out the ups and downs of the market. It helps you deal with the volatility of the market and ensures that your savings are not at risk. Hence irrespective of which phase the market is going through, your investments remain safe
• The Power of Compounding: Albert Einstein had pronounced the Compound interest as the eighth wonder of the world. Compound Interest is considered to be one of the greatest discoveries of mathematics. In the field of investments, time is the key but its common knowledge that it’s not the timing of the market but the amount of time spent in the market that strengthens the growth of capital. The power of compounding is an advantage of SIP that is realized over a long period of time. With the invested capital getting incremented over time, the accumulated wealth keeps growing. Let us take an example to understand the power of compounding. Mr. Malhotra starts investing ₹10,000 every year at the age of 30. While Mr. Ahuja starts investing the same amount of money every single year but from the age of 35. By the time both of these gentlemen reach the age of retirement, Mr. Malhotra would have raised capital of ₹11,33,000 whereas Mr. Ahuja would have raised only ₹7,31,000 at the same interest rate of 8% per annum. If we put this information into perspective, we’ll understand that a difference of ₹50,000 in the investment amounts by both the gentlemen would have generated a difference of ₹4,00,000 in the return amount. This difference would be a result of Compounding. Therefore, the longer is the investment period, the higher would the returns be. SIP is a long-term investment plan reaps the absolute benefit of the power of compounding.
• The Availability of Auto Debit Facility: SIP has always been the simplest way to invest and now with the evolution of automation technologies, it has become much more convenient. The fund managing companies auto debit the pre-determined amount on the date requested by you and will also credit the units to your account. The companies keep you updated about all the credit and debit transactions. Therefore, SIP amount on your requested date and credit the units to your account. It will also inform you in this regard.
• Ease of Investment in SIP vs. Hassles of one-time Investment: The ease of investing regularly in ELSS through SIP arises from the fact that it requires minimal supervision on the part of the investor and now with the auto-debit facility, the convenience has increased even more. On the other hand, a one-time investment entails a lot of hassle and is an unpredictable process as well. From sudden market crashes to smaller hurdles like the inability to withdraw the investment amount due to some strike or holiday or closure. SIP releases the investor from all of these hassles as neither market crashes nor, frequent physical hurdles can interrupt the process of investments.
• Low Investment Amounts: A major advantage of SIPs is that it enables participation in the stock market at a really low minimum investment amount. SIP can be initiated at an amount as low as 500 rupees (Certain Mutual Funds permit an opening amount as low as 100 rupees). With such a low investment threshold, SIP ensures that people from all walks of life and financial backgrounds can partake in the benefits it offers. As opposed to the financial burden and pressure that accumulating money for a one-time investment puts on the investor. The pressure of raising money through savings for a One-time investment deters people from investing. Whereas SIP ensures that you do not have to go out of your way to save in order to invest, it can be done organically over a period of time.
• The Habit of Investment: Benefits of SIP get extended to the personal realm as well. It inculcates in the investor a sense of financial discipline and facilitates a systematic way of handling one’s finances. This method of regular investments enables you to grow your wealth over a period of time without placing any financial burden. SIP rears us to make systematic investments a way of life. Whereas accumulating capital for a one-time investment is a tedious task and one needs to pay attention and stress about saving up for investments, SIP completely does away with this and makes the investment a habit for the investors.