Which is better Lump Sum or SIP for ELSS mutual funds

Equity Linked Savings Schemes, or ELSS, are equity diversified funds that offer a benefit under Section 80C of the Income Tax Act. Since there is a lock-in of three years on ELSS investments, what is the best way to invest in these funds - Lumpsum or SIP ?

Risk

ELSSs are equity schemes that invest most of their corpus in stocks. Therefore it is better not to invest whole amount at once and stagger your investments over the whole financial year. If you invest a large sum at one go, you could end up catching a high point of the equity markets. If the markets fall sharply thereafter, a substantial portion of the value of your money can get eroded in the short-term. To save yourself from the stress this may induce, you should always opt for SIP to invest in equity.

SIP helps you average out your purchases and risk both. Investing lumpsum is also okay if you are looking to stay invested for a 10 years or more.

Source of Income

If you are salaried person than its makes sense to invest via SIP as it is convenient for salaried people to invest monthly rather than investing whole amount at the beginning. Evermore, if you try to invest lumpsum at the end of financial year, chances are there that you will either end up short of the amount to be invested.

If you are a business owner and your income is seasonal,  you can opt for lump sum investment or a combination of lump sum and SIP, based on your monthly cash-flows.

Lock-in Period

Each SIP installment is locked for another 3 years while with lumpsum there is only one installment which is the only installment locked for three years. Thus, some people believe that lumpsum helps you to deal with lock in period in a better way. Let's see the practical view of this.

Case 1: Lumpsum investment in the first month i.e. April

Lumpsum invested in April 2017 will be locked till March 2020.

SIP amount invested in April 2017 will be locked till March 2020 and the last installment of SIP which will be in March 2018 will be locked till Feb, 2021. This way you are saving the lock of 11 months by investing lumpsum. This is good when you see this way.

In reality, it may be difficult to get the whole amount to invest at the beginning of financial year. Even to get the whole amount at once you need to save periodically until you get some bonus.

Case 2: Lumpsum investment in the last month i.e. March

Lumpsum invested in March 2018 will be locked till Feb 2021.

SIP amount invested in April 2017 will be locked till March 2020 and the last installment of SIP which will be in March 2018 will be locked till Feb, 2021. This way you are not saving anything in lock-in period.

Returns

If you have to make ELSS investments every year for tax saving, over a long investment horizon, the difference in returns between lump sum investment and SIPs will be, in most cases, not be very significant.
 

Conclusion

To invest lumpsum or SIP depends on personal financial condition. According to me, best approach will be to have a mix of lumpsum and SIP. Simplest approach is to invest via SIP and not to invest lumpsum.

Happy Investing!!!