In markets, it is always effective to start investing with a small amount. The reason behind this is that you don’t lose much when your investments are not profitable. Besides this, investing a small amount regularly can help you create a big fund in the long term. And if a large portion of your big fund is invested in good companies that receive high investor interest, you can earn reasonably good returns.
But not many investors are capable of doing this. It requires time, skills, knowledge, and a high commitment to constantly updating yourself on investments. These aspects may be challenging for many, given their commitments or focus on equally important things such as their job or vocation. A solution to this is investing in mutual funds through a Systematic Investment Plan (SIP). Investments in mutual funds through SIPs can help you achieve reasonably good returns in the long term. Let us understand the essential features of SIP investments to gain from it:
What is SIP?
Investing through SIP in equity funds has rewarded many investors in the past. Some investors see SIP as a ticket to wealth creation. Regular investment in a mutual fund scheme is convenient for investors, especially the salaried class.
You do not need to invest a large sum in starting investing in mutual funds. You can invest with small regular instalments. It is a series of payments you commit to make to a fund house as an investment in a selected mutual fund scheme. In this arrangement, a fixed sum of money gets transferred to the bank account of a mutual fund scheme at a fixed interval –weekly, monthly or quarterly. In return, the mutual fund allots units of the scheme you have selected at the prevailing Net Asset Value (NAV) of that day. As time passes by, your SIP helps you accumulate units of mutual fund schemes.
Fund houses define the minimum amount of installment and minimum tenure for each SIP, keeping in mind a certain targeted investment amount by an investor for a scheme.
According to data released by Association of Mutual Funds in India (AMFI), there are ₹4.49 crore SIP accounts at the end of September 2021. In August 2021, ₹9,923 crore were invested in various mutual fund schemes through SIP.
Mutual funds & SIP
Some investors cannot distinguish between mutual funds and SIP or use these terms interchangeably. However, they are not the same. While mutual fund schemes are vehicles to invest in various asset classes such as stocks, bonds and gold, the SIP is a way to invest in a mutual fund scheme. Though most mutual fund investors are conversant with investing in equity funds using a SIP, one can also start a SIP in mutual funds' debt and gold savings schemes.
Is SIP safe?
While many people invest in mutual funds through SIPs, a section of investors are not clear whether SIPs are safe enough. Mutual funds schemes invest money in stocks, bonds and gold. Hence, mutual funds do not offer assured returns. Their net asset value keeps fluctuating in line with the movement in prices of these securities. So investors earn a market-determined rate of return.
However, SIPs help you to reduce risks. Since you invest a small amount at regular intervals, over a period of time, you are not exposed to the timing risk. In other words, you do not end up investing all your money when the market is at a peak.
Also, when you invest in instalments, you accumulate units of mutual fund schemes at varying prices – both in good times and in not-so-good times. You make money as the markets go up in the long run, beating the average price for all these investments by a decent margin. SIP, thus, is seen as a relatively less risky way of investing in a volatile asset class such as equity.
How to start an SIP?
If you have already completed the mandatory formalities, which include ‘Know Your Client’ (KYC) norms, you can invest in a mutual fund scheme. You can also start a SIP in a mutual fund scheme by filling up a simple form and signing a mandate to debit money from your bank account. SIP can also be started online from the comfort of your home.
Can you stop SIP?
When you sign up for a SIP, you should be keen on investing for the long term to earn good returns. But some investors stop their SIPs for reasons ranging from lack of savings in a particular month to loss of income due to loss of job. If you see such a situation as a temporary phase, you can keep your investments through SIPs on hold for a particular month or two. Many platforms offer this ‘pause SIP’ facility. But if you expect the situation to last for a period longer than a month or two, or the scheme in which you are investing is not performing as expected, or you want to stop your SIP for any other reason, then you can write to the mutual fund house and stop the SIP. If you are investing online, then you can stop the SIP online.
Can you alter SIP?
After you sign up for a SIP, things may change. Say you get a raise in your salary. In such cases, you can change your SIP amount. However, the process is a bit cumbersome. So it makes sense to start a fresh SIP for that additional amount.
SIP & Recurring deposit
Most Indian investors are well-versed with recurring deposits with banks. These entail an investment of a fixed amount of money each month for a certain number of instalments. And that is where the similarity between SIP and recurring deposit (RD) ends.
While RDs assure you returns, SIPs in mutual funds offer market-linked returns. All RDs started for a specific tenure, at a given moment of time with a bank, will fetch the same rate of return. Meanwhile, SIP in various schemes of a mutual fund house will give varying returns. RDs, pay interest, whereas SIPs in mutual fund schemes may bring in capital gains.
It might be noted that an SIP in a mutual fund scheme may give you capital loss as well. Whereas, an RD can be covered under the Deposit Insurance And Credit Guarantee Scheme, in case the bank in which the RD is made fails
Variable SIP
Though traditionally SIP in mutual fund schemes transfer a fixed sum of money from the bank account of an investor to the mutual fund in exchange of allotment of units, today, things are changing. Some online transaction platforms offer variable SIPs. A variable SIP decides the investment amount based on valuation tools which measure the relative attractiveness of stocks. If stocks are attractively valued, then a variable SIP puts more money than in situations when stocks are pricey. Investors give a ‘range of sums’ that can be invested when he signs up for a variable SIP.
Lock-in and Exit loads
Each instalment of a SIP is treated as a separate investment in a mutual fund scheme when it comes to lock-in and exit loads. Equity Linked Saving Schemes (ELSS), popularly known as tax saving schemes, have a lock-in period of three years. If you invest in one through SIP, then units allotted to you in each instalment have to complete three years of lock-in. Exit loads are also applicable to each instalment of the SIP. If schemes charge an exit load for selling units before completing one year from the date of allotment, then you should try to avoid this.
Can an SIP save tax?
If you are investing in an ELSS through an SIP, you will get a tax benefit. Investments in ELSS up to ₹ 1.5 lakh in a financial year are eligible for deduction under section 80C of the Income Tax Act.
All profits made on the sale of investments made in mutual fund units through a SIP are subject to capital gains tax rules. Dividends (technically known as income distribution cum capital withdrawal) received on units of mutual funds bought through SIP are also subject to taxation.
Though SIP is no guarantee of investment success, it improves your chances of accumulating an extensive corpus to fund your financial goals in the future.