In simple terms, investing is the act of allocating funds. After entering the job market, young professionals look for options to earn extra income. In recent years, people have realized that the income earned from full-time employment might not be enough. That’s where people opt to invest in the market. In the market, investors will come across mutual funds, one of the numerous investment tools.
However, it is essential to note that mutual funds are not a monolith. There are numerous types of mutual funds, of which equity-linked savings schemes are one of them.
What are equity-linked savings schemes?
Equity-linked savings schemes or ELSS are open-ended mutual funds with a three-year obligatory lock-in period. In an ELSS, equity accounts for more than 80% of the assets. Another prominent feature of ELSS is that they are covered by Section 80C of the Indian Income Tax Act, 1961. As they are protected by the said law, an investor can deduct up to ₹1,50,000 from taxable income by investing in an ELSS plan. There are two types of investment modes in ELSS. One is SIP, and the other is a lumpsum investment.
Lumpsum investment:
The first thing that might come to a prospective investor’s mind after hearing the term is “what is Lumpsum Investment?” Lump-sum investment is one of the two ways of investing in mutual funds. It is called the lump-sum mutual fund investment if you support the entire amount available to you in a mutual fund scheme. A lump sum investment is an act of depositing the whole amount in one go. Listed below are some of the benefits of lump-sum investments:
There are tax benefits:
Opting to make a lump-sum investment at the beginning of the financial year might enable an investor to receive significant tax benefits under Section 80C of the Indian Income Tax Act, 1961, up to ₹1,50,000 from total taxable income. Moreover, it also provides for higher returns on long-term ELSS investments.
You need to invest only once:
If you are a self-employed investor with no consistent income source, you should consider investing in lump sum quantities. SIPs demand a predetermined amount to be deposited regularly; investors who rely on seasonal revenues may struggle to keep up with the payments of a structured investment plan.
Systematic investment plan (SIP):
A systematic investment plan (SIP) is an investment mode through which you can invest in mutual funds instead of supporting the entire amount in one go, like a lumpsum investment. Investments in SIP can be monthly, quarterly or semi-annually, etc. When you invest steadily in this manner, it can become easier to meet your financial goals. When you invest through a SIP, you can invest a fixed sum of money in a given period. This amount lets you purchase a certain number of fund units. If you continue to do this for a long time, you get to invest in the fund during the highs and lows. After determining the investment tenure and frequency, you can automate your investments by leaving a standing instruction to your bank to transfer the amount directly from your bank account into the mutual fund SIP of your choice on a fixed date. Listed below are some of the benefits of a systematic investment plan (SIP):
You can enjoy the benefits of the power of compounding:
Investing money in SIP allows you to take advantage of the power of compounding. Regular investments in a scheme help you to enjoy compounding, which means you earn interest upon interest as it is added to the original amount. This is very beneficial for long-term wealth creation.
Investors can enjoy flexibility:
Through a SIP, an investor has the flexibility to choose things like the amount, duration, and interval of the SIP. Moreover, they also have the option to change the amount, pause or stop the SIP.
Investors are disciplined:
SIP inculcates the value of disciplined investing in an investor as they are committed to supporting a specific amount for a fixed period which is essential in long-term wealth creation.
If you are investing at the end of a financial year or have a higher risk appetite, you can opt for lumpsum investments. SIPs, on the other hand, are an excellent option if you don’t have enough balance in your account for a lump sum investment.
Mutual Fund Investments are subject to market risks; read all scheme-related documents carefully.
