Equity-Linked Savings Scheme: How SIP makes ELSS a smart bet

Disciplined savings and ability to ride out market volatility ensure that investing in ELSS via SIP generates higher returns over the long term while saving on taxes.

Investments in ELSS up to Rs 1.5 lakh qualify for tax rebate under Section 80C of the Income Tax Act.

Equity-linked savings schemes (ELSS), a popular tax-saving investment option, reported net inflows of Rs 4,579 crore in the three months to March as investors rushed to invest to save on tax. In contrast, this category witnessed net outflows of Rs 3,870 crore for seven months in a row from April to October last year.

Experts say individuals invest in ELSS in the last three months for the financial year and invest a lumpsum amount. Ideally, they should invest every month starting April through systematic investment plan (SIP) which will help in the rupee cost averaging. Investments in ELSS up to Rs 1.5 lakh qualify for tax rebate under Section 80C of the Income Tax Act. In fact, ELSS has the lowest lock-in period of three years as compared to other tax-saving instruments.

Advantage of SIP in ELSS

In a SIP, the money (minimum investment is Rs 500) will be deducted from the bank account and invested in the scheme. The investor will get the units as per the net asset value of the fund on that day. Every SIP will have a lock-in for three years, which experts say is an advantage as equity-related investments fetch higher returns in the long run and the funds are able to ensure both long- and short-term gains for investors. The lock-in also ensures disciplined investments which can help the corpus grow for long-term financial needs such as children’s higher education or own retirement. The lock-in also removes the stress of short-term market volatility, which is a big concern for investors, especially the newer ones.

Investing in ELSS through SIP enables an individual to invest in the scheme across business cycles and in the long run the purchase price of the units gets averaged. Investors can opt for a direct ELSS plan and invest online. A direct plan will have lower expense than a regular plan which can help investors to grow the corpus more than a regular plan.

Santosh Joseph, founder, Germinate Investor Services LLP, says if an investor is investing in ELSS through SIP he does not have to worry about putting aside large sums of money and can start saving from his first pay slip. “As the investment is happening on a month-on-month basis, which is a periodic investment, you are also going to be riding out market volatility. Saving on a regular frequency, riding out market volatility by doing a monthly SIP and investing in a product which gives higher returns because of a three-year lock-in is the way to being successful in equity investing,” he says.

Look at long-term performance

As ELSS investments are for the long term, investors must analyse the long-term returns of various schemes before investing. All ELSS schemes allocate a minimum of 65% to equity and the rest to debt instruments. Looking at the scheme’s past performance over a 5-10 year period, consistency of the fund and the company, and how long the fund manager has been handling the fund are good ways to go about selecting an ELSS scheme, says Joseph. Do ensure that the scheme has a mix of large, mid and small cap stocks in its portfolio as this will enable to post good returns in various market cycles. Schemes which invest across a range of stocks and sectors are also better equipped to handle any cyclical market volatility.

Investors must stay invested for at least five to seven years to earn returns that are higher than any other tax-saving investment option.


— Systematic investment plan every month helps in rupee cost averaging
— It enables an individual to invest in the scheme across business cycles
— Every SIP will have a lock-in for three years, thus allowing the corpus to grow for long-term financial needs
— The lock in removes the stress around short-term market volatility

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