Many investors are interested in equity-linked savings schemes (ELSS). However, there is a widespread assumption that the only method to invest in ELSS is through a Systematic Investment Plan (SIP).
Let us analyze whether you should invest a lump sum in ELSS mutual funds.
What is ELSS?
This is a type of mutual fund that allocates the majority of its money into stocks and other equity-related products. Section 80C of the Income Tax Act of 1961 permits an individual or a HUF to claim a tax deduction of up to Rs. 1.5 lakh per year. The funds have a three-year lock-in period, which also happens to be the shortest among other section 80C investments.
These tax saver mutual funds offer a dual purpose of capital appreciation, as the majority of them are invested in equities and tax savings.
When you invest a lump sum amount in ELSS tax-saving mutual funds, you purchase units that are worth the investment amount at the current NAV (net asset value) of the fund. When the markets have moderate price volatility, it is preferable to invest a lump sum amount in mutual funds.
This is because the prices of the funds are very stable in these markets, and cost averaging is no longer significant. The returns are much higher because the entire money is invested at any given moment, and the powers of compounding can double returns at an exponential pace.
If you have a lump sum investment amount available, it is recommended that you spend the entire Section 80C tax deduction advantage of Rs 1.5 lakh in tax-saving investments at the beginning of the fiscal year. This helps you to earn bigger returns on your investments because your money is invested for a longer period. Furthermore, you are not required to make a hasty investment decision at the end of the year.
For business owners with seasonal revenue, a lump sum investment might be a suitable investing strategy. If not, they may consider investing in both SIPs and lump sums based on their income cash flows. This will ensure that they are not financially burdened while investing.