SIP or Lumpsum : Which Is Better For ELSS Investment?

ELSS funds allow investors to either allocate a lump sum at once or invest through Systematic Investment Plans (SIPs). Let us explore the difference between the two options through the prism of various factors and evaluate which option is better suited for ELSS investments.

In a lump sum investment, the entire amount is invested at one go and get locks altogether at once for a period of three years. At the end of this lock-in period, the entire invested amount is free for redemption. For instance, the lock-in period for an investment made on 31st March 2020 shall end on 31st March 2023.An ELSS fund also allows investors to make periodic investments throughout the year via SIP. SIP is an approach where the investor invests a fixed amount at regular intervals. The frequency is decided by the investor, say monthly, quarterly, etc. When it comes to the lock-in period, each balance of units received per month shall be treated as a separate installment.For instance, in a monthly SIP, the amount invested on 30th April 2020 shall be free from its 3 year lock-in period on 30th April 2023, and the lock-in period for the next monthly installment made on 30th May 2020 shall end on 30th May 2023.

The main implication of investing in SIPs vs investing as lump-sum lies in risk diversification. The two approaches carry varying degrees of risk. A lump-sum investment is exposed to greater risk as the entry point of the investment is singular.On the other hand, the risk of ELSS investments made through SIPs is spread better as investors can benefit from receiving more units when the NAV is low and eventually time their exit when the NAV is high. Thus, SIPs offer the benefit of rupee cost averaging and thereby enable better risk diversification.

As discussed earlier, lump-sum investments carry a greater element of risk. However, this risk also comes with a higher return potential, especially when the market conditions are favorable.The risk-return tradeoff also applies to SIPs. While systematic investment plans offer better capital protection by reducing the risk element associated with the ELSS investment, there is also the possibility that they may end up generating lower returns than a lump-sum investment.Thus, as an investor, depending on your cash flow, risk appetite, and expected return, you may choose to invest in ELSS funds via SIP or as a lump-sum.Pro Tip: If you are a salaried individual, you may opt for the SIP route. But if you are generally backed by a tidy sum and are not usually strapped for cash, then you may consider a lump-sum investment. Also, choosing a lump sum would make sense if you are making a last moment investment, but if you have the time to carefully plan your investment, then you may consider SIPs.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.