ELSS vs SIP: A Beginner’s Guide

Equity-Linked Savings Scheme or ELSS is a type of mutual fund with a lock-in period that is ideal for tax saving, while Systematic Investment Plan or SIP is a method of investing in any mutual fund.

Over the years, mutual funds have become an incredibly popular investment option in India. The gradual shift to this relatively new investment option has been mainly due to professional management, diversification, tax benefits, low investment threshold and liquidity. 

Mutual funds are also a super convenient way to invest in the stock market to achieve your investment goals. Two popular terms that you would often come across in connection with mutual funds are ELSS and SIP. In the following sections, we will understand the meaning of these terms in detail.

What is ELSS?

Equity-Linked Savings Scheme (ELSS) is a specific type of mutual fund that directs the majority of its assets towards equity. ELSS also doubles as a popular tax-saving investment, with a lock-in period of just 3 years, which is the shortest among all tax-saving options.

ELSS is the only tax-efficient mutual fund scheme. Under Section 80C, you can claim tax deductions up to  Rs. 1,50,000 on the investment made in a financial year. Compared to other tax-saving investments like Public Provident Fund, National Savings Certificate, and tax-saving fixed deposits, ELSS also has a higher potential to provide higher returns.

These funds can be used as a tool for long-term financial planning as they can deliver returns that outpace inflation. However, do keep in mind that ELSS funds are subject to market risk, and the value of investments can fluctuate based on how the equity markets perform.

Read More About What is ELSS Mutual Fund?

What is SIP?

Mutual fund investments can be made either as a lump sum or on a recurring basis. A systematic investment plan (SIP), is when you consistently invest a certain amount in mutual funds. You can start investing and building wealth without stressing about market timing or making large lump sum investments.

SIP also helps benefit from the power of compounding. This means that over time, thanks to interest rates and returns, your regular investments can substantially increase in value. The frequency of a SIP can be weekly, monthly, quarterly, or twice a year. You also get to decide the amount you want to invest in a SIP, provided it is not below the minimum investable amount set by the fund house. So, if you’re new to investing or just looking for a way to save money, SIP might be the perfect option for you.

ELSS vs SIP: Breaking Down the Differences

ELSS and SIPs are different concepts that cannot be directly compared as they have different functions. To better understand ELSS vs SIP, you need to have a clear understanding of each.

1. Basic meaning

While SIP is an investment method that can be used for ELSS and other types of mutual funds, ELSS is a type of mutual fund that is designed to provide tax savings.

2. Lock-in period

The minimum lock-in period for ELSS funds is 3 years, and this applies to investments made through SIPs as well. The fund house may also charge you with a penalty in case of delayed payments. There is no lock-in period for other types of mutual funds.

Read more about the Lock-in Period In Mutual Funds

3. Tax benefits

The major advantage of ELSS funds is the tax benefits and you can claim up to Rs. 1,50,000 in a financial year. No such tax benefits are available for other mutual funds.

4. Option to switch funds

Be it SIPs or lump sum investments, you can choose to exit the mutual fund whenever you wish to. However, with ELSS funds, this is not an option. You cannot exit the fund before the completion of the 3-year lock-in period.

5. Rupee cost averaging

SIPs offer the advantage of rupee cost averaging. Over time, the average cost of investing in mutual funds through SIPs is typically lower than making a lump sum investment. Not just that, you can also receive more units of the fund if the NAV decreases, while the value of your investment will increase if the NAV increases. While this applies to ELSS via the SIP route, it doesn’t apply to lump sum investments.

ELSS or SIP: Which Is the Right Investment Choice? 

Deciding whether ELSS or SIP is better is not possible as they are different concepts falling under the mutual funds category, and it’s like comparing apples and oranges. However, you can make the most out of both by investing in a tax-saving SIP.

By investing in a tax-saving SIP, you can systematically save taxes without rushing at the last minute to reduce tax liability. Moreover, investing through SIPs encourages savings discipline and helps in rupee cost averaging, leading to better returns under ELSS funds.

In summary

By now, you would be clear that ELSS is a financial product and SIP is a process. SIPs are a great way to kickstart your investment journey, and ELSS will help you save taxes. You can also look at combining these two concepts to take advantage of rupee cost averaging and tax-saving in the long run. Not just that, you can also diversify your investments through multiple SIPs in different mutual funds based on your financial goals, risk profile, and timeline for investments.

Mutual Fund Calculators:


ELSS vs SIP: Which one is a better tax-saving option?

ELSS provides tax benefits for investments up to Rs. 1,50,000 under Section 80C. SIP, on the other hand, is an investment technique that does not provide any tax advantages. If you wish to reduce taxes while investing in equity mutual funds, ELSS may be a smart option.

Is it possible to invest in both ELSS and SIP?

Yes, you can invest in both ELSS and SIPs. ELSS is beneficial for tax savings, while SIP is beneficial for regular investments and wealth creation.

Are ELSS and SIP investments risky?

ELSS and SIP are stock market investments that include some risk. Investing in a diverse portfolio of mutual funds can help reduce risk and volatility in the long run. Before jumping into any investment, you should have a complete understanding of all the risks and rewards.

How much should I invest in ELSS and SIP?

You should choose your investment amount based on your goals, risk tolerance, and financial situation. You can also reach out to financial advisors for more help.

ELSS vs SIP: What are the tax advantages?

ELSS gives tax benefits under Section 80C, and this is applicable to investments made through SIPs as well. But there are no such tax benefits associated with other mutual funds.