Equity-Linked Savings Schemes have grabbed the attention of quite a lot of investors. However, there’s a preconceived notion behind ELSS investments – investors assume that the ideal way to invest in ELSS is only through SIP. Is that true? Can you make a lumspum investment in ELSS funds? Let’s understand whether you should invest a lumpsum in ELSS mutual funds or not.

What is ELSS?

Equity-Linked Savings Schemes are types of mutual funds that invest majority of their assets in equities and equity-related securities. It allows an individual or an HUF (hindu undivided family) for a tax deduction of up to Rs 1.5 lac per annum under section 80C of the income tax act, 1961. As a result, one can save up to Rs 46,800 by investing in these tax saving mutual funds provided that they belong to the highest tax slab. As this amount is deducted from the total taxable income of an individual, it largely reduces the tax burden on an individual. These mutual funds have a lock-in period of just here years, which also happens to be the lowest lock-in period among other Section 80C investments. These tax saver mutual funds serve the dual purpose of capital appreciation (as majority of the assets are invested in equities) and tax-saving purposes.

Why should you consider investing a lumpsum in ELSS mutual funds?

When you dedicate a lump sum amount in ELSS tax-saving mutual funds, you buy mutual fund units which is worth the investment amount at the then prevailing NAV of mutual funds or net asset value of the fund. As a result, the earnings earned is heavily depended on on the appreciation of the NAV of your fund.

Investing a lumpsum amount in mutual funds is preferred when the markets have low price volatilities. This is because the prices of the funds are somewhat steady in these markets and thus cost averaging (a feature of SIP investment) become irrelevant in such situations. As the entire amount is invested in one go at any point of time, the returns are significantly higher, and the power of compounding is able to multiply returns at an exponential rate. We have explained a few benefits of investing a lumpsum amount in ELSS mutual funds. They are explained below:

  • If you have the lumpsum investment amount at your disposal, it is advised to invest the entire section 80C tax deduction benefit of Rs 1.5 lac in tax-saving investments at the start of the financial year. This allows for higher returns on your investments as your money is invested for a longer duration. What’s more, you do not have to make a hurried investment decision at the end of the year.
  • For business owners who have seasonal source of income, lumpsum mode of investment would be an ideal investment way. If not that, then they might consider investing in both SIP (systematic investment plans) and lumpsum investments basis their income cash flows. Doing so will ensure that these business owners are not stressed financially during investing.

Both SIP and lumpsum investments have their own set of pros and cons. If you go forward with lumpsum investment, you might consider using a lumpsum calculator. A lumpsum return calculator helps to evaluate the future value of lumpsum investments which can be beneficial in planning your investments. Happy investing!

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September 2021