Choosing the right type of mutual fund is important for the achievement of your investment goals. Other factors that may determine your choice are your ability to tolerate risk, the availability of funds with you, and the period for which you wish to invest. The first step in investing is to decide your investment goals and then compare the various types of mutual funds to choose the one that matches your requirements. Here we talk about types of mutual funds– The ELSS or the Equity Linked Saving Scheme and the SIP or the Systematic Investment Plan. Let us find out more about these mutual fund categories and their features.
ELSS: Highly Suitable for Long-Term Financial Planning
As the name suggests, this mutual fund invests predominantly in equities. But there is a lock-in period of three years from the date of the purchase. Highly popular because of its tax saving feature, this fund offers tax exemption under Section 80C of the Income Tax Act. An investor can get a tax exemption of up to 30% (depending on his tax bracket).
Here are some things you should know about ELSS funds in India:
- The lock-in period allows the fund manager to invest in the equities for the long term in absence of any redemption pressure in the short term.
- ELSS funds can invest only in equities and cannot be a hybrid or even a balanced fund.
- ELSS is a tax-saving fund and thus highly suitable for investors who wish to create wealth while saving taxes. People who are willing to take risks may find ELSS highly suitable.
SIP: In Sync with Your Financial Goals
A Systematic Investment Plan or SIP allows investors to invest in a phased and disciplined manner. The amount deposited by an investor in a SIP can then be used to invest in equity and debt schemes. The investor has to deposit a fixed amount regularly for a pre-decided period that can vary from a month to a quarter, half-year or annually. The advantage of investing in this category of mutual funds is that it combines the benefits of price averaging and compounding.
Some important things about a SIP:
- Discipline Plus Benefit of Compounding – This investment option inculcates discipline amongst investors as they have to contribute a specific amount after a certain period. The amount can be decided by the investor after considering their expenses. Investors also have the option of raising their contribution when they have surplus funds. The scheme offers investors the benefit of compounding which means that they earn not only on their principal deposit but also on the earnings on them.
- Averaging – SIP investments at different times ensure that the fund managers purchase stocks at different prices with the total cost of buying a stock gets averaged over time.
The decision to choose between ELSS funds in India and SIP mutual funds will depend on the funds available to you and the timing of the investment. However, if you wish to invest small amounts every month or quarter, SIP is a better option. SIP allows investors to maximize returns by investing small sums rather than waiting to accumulate a big amount and invest in ELSS or any other form of lump-sum investment.