13 Things you need to know about systematic investment plan

Key Highlights

• SIPs provide access to a diverse range of mutual funds, enabling investors to spread their investments across various asset classes.

• SIPs are ideal for long-term investors, as they align with the principle of accumulating wealth over time.

• SIP investments are flexible, allowing investors to start, stop, or modify them at any time.

1. What is SIP exactly?

SIP or Systematic Investment Plan is a structured method for consistent investment in mutual funds. In instances where significant funds may be lacking, SIP offers a solution. Upon initiating a SIP with a chosen mutual fund, a fixed monthly amount is deducted from your account and invested in the mutual fund of your preference. Over the course of time, your investments continue and steadily increase.

2. SIP Safety Assessment

Investing in mutual funds through SIP is a highly secure approach. Opting for a lump sum investment in a mutual fund exposes you to the risk of paying a premium due to market conditions. To mitigate this risk, investing in mutual funds during periods when the markets are not overvalued requires a solid understanding of market dynamics, commonly referred to as timing the market.

3. SIP returns are subject to taxation

The taxability of SIP returns depends on the type of mutual fund invested in and the investment duration before redemption. Returns from equity mutual funds are exempt from taxes if redeemed after a year of investment. However, if redemption occurs before a year, a 15% tax is levied on the gains.

On the other hand, debt mutual funds are taxed at a rate of 20%, with indexation benefit, when redeemed after 3 years from the investment date. If redemption takes place before 3 years, the tax is based on the investor's income tax slab.

It's important to note that taxation in the case of SIP is computed individually for each SIP instalment. For example, if you have a monthly SIP of ₹1000 from January 2018 to December 2018 in an equity mutual fund, each instalment is treated separately for tax calculation. To avoid taxes, you should redeem each instalment after the completion of 12 months from its respective investment date.

4. Can SIP be stopped?

Certainly. Unlike fixed deposits (FD) and recurring deposits (RD), you can cease an SIP at your convenience. Once the payments for an SIP plan are halted, you can opt to either withdraw your funds from the mutual fund or continue to maintain your investment in the fund.

5. Does SIP offer tax savings?**

Indeed, SIP can help you save taxes when employed to invest in tax-saving ELSS mutual funds. By investing in ELSS mutual funds through SIP, you become eligible for tax deductions of up to ₹1.5 lakh under Section 80C.

To maximise the benefits of ELSS mutual funds through SIP, ensure that the cumulative total of all your SIP investments within a financial year amounts to ₹1.5 lakhs. Investing beyond this limit won't yield additional tax benefits. However, if you perceive ELSS mutual funds as a sound investment, you can still choose to invest in them.

6. Can the SIP amount be reduced?

The process for accomplishing this task is quite intricate. However, there is a straightforward solution to address this issue. You can initiate a new SIP in the same fund with the augmented amount.

For instance, if your existing SIP is ₹10,000 per month and you wish to raise it to ₹12,000 per month, you can effortlessly commence a new SIP with the increased amount within the same mutual fund.

7. Can SIP start online?

Yes, SIP (Systematic Investment Plan) can start online, making it a convenient and accessible investment option for individuals. Many financial institutions and mutual fund companies offer online platforms where investors can initiate and manage their SIP investments.

Investors can monitor their investments, track performance and modify their SIP plans conveniently through the online platform. This accessibility promotes financial inclusion, enabling more individuals to participate in disciplined and automated investment strategies.

8. Does SIP have a lock-in period?

If you opt for an open-ended mutual fund, your SIP will not be subject to any lock-in period. The presence or absence of a lock-in period is entirely contingent upon the specific mutual fund you choose to invest in. Certain mutual funds, such as ELSS mutual funds, impose a lock-in period with a mandatory 3-year holding period. Other funds may also have similar holding requirements, classified as close-ended mutual funds.

9. Is there a charge for exiting a SIP?

The presence of an exit load in a SIP is entirely contingent upon the policies of the specific mutual fund. If the mutual fund outlines an exit load for a particular duration, it will also apply to the SIP. Typically, equity funds impose a 1% exit load if redeemed within a year from the investment date, with no exit load after that. The exit load is calculated based on the redeemed value.

For instance, if there's a 1% exit load for redemptions within a year, and you are redeeming ₹100,000 before the year is up, the exit load would amount to ₹1,000 (1% of the total redeemed amount).

10. Is SIP better than recurring deposit?

SIP possesses the potential to yield significantly greater returns than RD. The returns from your SIP are influenced by the specific mutual fund in which you decide to invest. Debt mutual funds are generally perceived as low-risk options, while equity mutual funds are considered higher risk. Unlike RD, the rate of return in mutual funds is not fixed.

Debt funds typically offer more attractive returns than RD and are considered lower risk. If you are comfortable with assuming greater risk, consider initiating an SIP in higher-risk equity mutual funds.

11. SIP is considered beneficial for the long term.

it is advisable to engage in long-term SIP investments. Rather than delaying and accumulating funds for investment, you initiate investments with the available savings, ensuring your money is consistently invested. Moreover, opting for long-term investments safeguards your portfolio from the impact of short-term market fluctuations.

12. Is SIP and mutual fund the same thing?

SIP is a strategy employed for mutual fund investments, providing two primary approaches: lump sum and systematic investment plan. With a lump sum investment, a substantial amount is invested in a mutual fund in a single transaction. Conversely, in SIP, smaller amounts are invested at regular intervals, typically on a monthly basis.

13. Which SIP to invest in?

Which SIP to choose for investment depends on your individual requirements. For those comfortable with taking risks, exploring small and mid-cap mutual funds is an option. Alternatively, if you prefer moderate risk, large-cap mutual funds may be suitable. For those seeking very low risk exposure, exploring debt mutual funds is recommended.

Conclusion

While investing in the share market, investors must stay informed about market trends, fund performances, and utilise economic indicators. Periodically reviewing and adjusting the SIP portfolio ensures that it remains aligned with the investor's evolving goals and market conditions. A well-informed and disciplined approach to systematic investment plans empowers investors to navigate the complexities of stock markets, encouraging long-term wealth creation and financial well-being.