Everything You Want To Know About SIP
If you are someone who regularly watches television or listens to the radio while driving, you must not be a stranger to SIPs. The innovative ads for the safe investment tool have attracted many people to try out this option. But if you are new to this, these ads must have sparked some curiosity to figure out what exactly is an SIP. This is what we are here for, so let’s explore.
What is a SIP?
A Systematic Investment Plan (SIP) is a tool that enables you to invest regularly in mutual funds. When you set up a SIP, a predetermined amount is debited from your account every month and put in a mutual fund of your choice.
How do you start a SIP?
SIP is an open-ended scheme. You can start anytime you want. All you need to do is submit the application form and the required documents to your bank. The application takes about 10 to 30 days to process, depending on the bank. In most cases, you can start a SIP with just Rs. 500.
SIPs provide investment flexibility. When you start using the tool, you can decide for how long you want to continue with the SIP. Many SIP providers have a minimum tenure of 6 months. You can also choose a perpetual SIP. In this case, the SIP does not stop till you intimate the provider. Here, you can set a goal for the returns you want to earn. Continue investing through the SIP till the goal is met and discontinue after.
You may also customise how often you would like to invest. Most banks and fund houses allow you to put in the money every month, fortnight, or twice a month as per your convenience.
Managing a SIP
Changing the amount
Changing the amount you invest in every installment is not a straightforward task. You will have to cancel your existing plan and start a fresh one. The good part is that there is no charge or penalty for the same.
For example, you wish to reduce your installment amount from Rs. 10,000 to Rs. 8,000. For this, you can cancel your current plan of Rs. 10,000. After this, you can easily start a new SIP in the same mutual fund with the reduced amount.
During the long-term course of the mutual fund, a situation may arise where you do not have sufficient funds in your account. In such a case, the installment cannot be deducted. But this is not something to worry about.
There is no penalty for missing a SIP installment. The SIP does not get cancelled till you miss three consecutive installments. Banks may, however, charge a fee for missing an installment. Do check the policy for the same before starting the plan.
Cancelling or pausing the SIP
You can avoid the problem of missing an installment due to a financial crunch by pausing your plan. This can also be done in case you feel like giving your SIP a break. All you need to do is send a Stop Request to the mutual fund house. This must be done 30 days in advance of the next installment. You can do so via online or offline methods.
You can decide when you want to cancel your SIP. It is advised to hold the SIP for at least three to five years. This is because it averages out the fluctuations in the market over the long tenure. The longer you invest in the mutual fund, the higher your returns will be.
Payment of tax
Gains on equity mutual funds attract a 15% tax if redeemed within one year. However, the gain on the long-term funds (those redeemed after a year) has no tax levied on them.
As for debt mutual funds, if redeemed after three years, a 20% tax on gains is charged. This amount is first indexed before the tax is calculated. However, if redeemed before three years, the rate of tax depends on your tax slab. Further, it must be noted that tax is calculated separately for every installment of a SIP.
Why should you invest your money through SIP?
If you wish to have some discipline and consistency in your finances, then SIP is for you. There are plenty of SIP benefits. To begin with, you do not have to worry about investing the right amount in a mutual fund every month. The SIP automatically deducts the installment amount and invests it.
Further, the hassle of keeping track of market ups and downs is eliminated. Looking at the conditions every time before you invest can be a source of nervousness. This may affect the way you invest and may lower your returns. The SIP negates the effect of fluctuations. Due to a fixed installment amount, you get more units when the market is down, and less when the market shoots up.
In conclusion, investing in mutual funds is risky, but will fetch you higher returns than any short-term investment. All you need is small and regular investments, that are compounded over time to meet your long-term financial goals.