An easy and convenient way to achieve this is by investing in mutual funds through Systematic Investment Plans (SIPs). Just select the mutual fund, decide the amount to be invested and start investing. Since the SIP is linked to your bank account, the money gets credited to your SIP account every month.
Why you should invest through SIPs:
A SIP is a mode of investing in mutual funds of your choice steadily and systematically.
It allows you to invest small amounts regularly. It is an ideal way to invest in equities. You can start with as little as Rs 500 and increase the amount as your income goes up or till you become comfortable with the idea of investing in market-linked investments.
Once you set up a SIP in a mutual fund of your choice, a fixed amount gets deducted monthly from your savings bank account on the date chosen by you. The money gets invested automatically in the mutual fund scheme selected by you. This ensures that you are spared tracking the market and its impact on your investment. Since you are investing regularly, essentially the amount is invested at varied price levels.. This in turn reduces the fluctuation in returns.
SIP offers flexibility to increase/decrease the amount. As your salary rises, increase the SIP amount to match it. If at any point in time you are facing a cash crunch, you can reduce the amount, or even stop the SIP temporarily. This offers a complete control over your investments. Each monthly instalment gets added to the earlier one and you earn returns on a higher base each month, generating higher returns.
Benefits of SIP
- An ideal solution to the new dreams: One can plan different life goals be it conventional goals such as children’s future, retirement, international holiday, holiday home, etc or the new age ones which are specific to the age group.
- Convenience for the busy generation: In SIP, a fixed amount gets invested automatically at a fixed interval. One doesn’t need to spend time on a regular basis to put the money to work.
- You decide when, where, how much: SIP allows one to choose the frequency (monthly / quarterly / yearly) the debit date, investment amount, tenor, and one or many schemes to invest.
- Stay worry-free: The biggest benefit of SIP is that you don’t need to worry about timing the markets. Just stay invested irrespective of the market conditions. In doing so, you end up getting more units when the markets are down and fewer units when the markets are on the swing. This in turn leads to a lower average cost per unit over time which is also called as rupee cost averaging.
- Save regularly: The only way to achieve your financial goals is to save regularly. At times, you may get derailed by unexpected expenses. While you cannot avoid emergency expenses, ensure that other planned expenses are met from funds left after your savings. SIP is the best way to ensure this. It brings discipline by automating savings. You can use SIP to save for your emergency fund, to build a buffer for medical expenses and so on.
- Experience the 8th wonder - the power of compounding: With SIP route, one can stay invested for a longer period of time. Over time as your investment generates returns, the returns get added to the principal amount and this in turn generates more returns. This process gets repeated leading to a big corpus. That’s how the magic of compounding works. An investor starting out early can earn much higher returns than a one starting out late even with a slightly higher corpus.
What is SIP?
A Systematic Investment Plan or SIP is a method through which investors can invest a fixed amount of money at regular intervals in a mutual fund of their choice. SIP intervals can be fixed as weekly, monthly, semi-annual or annual weekly basis, as per the investor’s preference so that they can invest a pre-defined sum of money regularly and in a disciplined manner. To understand more about a Systematic Investment Plan, here are some of its major benefits:
- No need to time the market:
Many investors want to avoid the hassle of timing the market or decide the right time to invest in the market. So, they opt for SIPs which will allow them to start a long-term investment anytime and continue investing, irrespective of whether the market is facing a high or a low.
- Rupee Cost Averaging:
One of the major benefits of SIP is benefit of rupee cost averaging. Here, one need not worry about the market dynamics; instead, the SIP amount invested in the mutual fund will purchase more units during a market low and fewer units during a market high.
- Low investment cost:
SIPs are also generally preferred by investors since one can start with an investment as low as Rs. 500 each month. Hence, even low-risk investors not wanting to invest a large amount of money can opt for a mutual fund as per their risk profile and start a small but steady investment.
- Power of compounding:
By investing on a regular basis through a SIP, one’s investment can grow due to compound interest as the returns are reinvested. If you choose to invest for an extended time-period (say three years or more), these reinvested returns can grow through the power of compounding.
- Ease of investment:
Most investors may not have the time or the in-depth knowledge required for structuring one’s portfolio. SIP is a simple mode of investment, where one can give standing instructions to their bank and at regular intervals, the SIP amount will be invested in a mutual fund of their choice.
Power of Compounding
When you opt for a Systematic Investment Plan or SIP, compounding return is one of the major benefits.
In the case of your mutual fund investments, for instance, you invest a principal amount of ₹1000 in an equity fund with a rate of return of 15% per annum. If you do not withdraw this 15%, then this profit will be reinvested, and your new principal amount becomes ₹1150. And now, through the power of SIP compounding, you will be able to earn returns on ₹1150 instead of ₹1000.
Here is a simple and brief example to understand how the power of SIP compounding can impact the investment of 2 individuals of different investment tenures and a 15% rate of return.
The power of compounding is a concept wherein the returns on your investments are multiplied and magnified over the investment tenure. It is quite similar to a multiplier effect since the interest or returns earned on the principal investment amount is added to the principal and it is re-invested. This means every successive investment is a higher amount, thereby offering the potential to earn higher returns.
SIP or One-time: How Should You Invest?
Since there are two modes of investing in a mutual fund, investors can choose how they want to invest their money. Given below are the explanation and the distinction between the two modes.
Under the one-time investment mode, you can deposit a lump sum amount in your mutual fund investment.
In a Systematic Investment Plan (SIP), you can invest a fixed amount of money in your mutual fund at regular intervals. It enables investors to benefit from rupee cost averaging. This means the cost at which the mutual fund units are purchased is averaged out over the entire investment period.
Since market volatility impacts investments at different levels, rupee cost averaging works by purchasing fewer units of a fund during market highs and more fund units during a market low.
What to keep in mind when investing via a SIP?
- Choose the SIP Duration
The tenure of the SIP should be considered based on your risk profile and the time horizon for your goal. Ideally, keep track of your SIP and review the progress of your long-term investment on a regular basis as well as over a period of 5 years.
- Select a Fund House
As an investor, go with a reputed and experienced fund house. The performance of the fund house indicates what measures they take to handle the market fluctuations such that you, as an investor, do not feel the impact. Hence, it is as important as your choice of a particular mutual fund scheme.
How to Invest in SIPs
- Set your Goals:
It is necessary that you set your investment goals before choosing a SIP mutual fund investment. Since investments are made with specific goals in mind, charting out these objectives will help you find a fund option as per your investment needs.
- Choice of Plan:
To avoid getting confused with the variety of SIP plans available, follow some basic criteria to choose the plan. For instance, the past performance of the funds can be effectively used to help you understand which plan is most suitable for you. Likewise, you can also choose plans as per your goals. For example, funds that specifically address goals such as retirement or children’s education.
Tax Implications of SIPs
Before you start a SIP, it is important to know the implications of tax on mutual fund investments. The tax implications vary as per the type of mutual fund scheme. The profits from mutual fund investments are known as capital gains and are further classified into short-term capital gains and long-term capital gains.
When you sell equity investments after holding them for more than 12 months, the profits are classified as long-term capital gains. On the other hand, if investments are sold within 12 months, the gains are known as short-term capital gains.
In the case of debt funds, profits from investments that are held for a period of over 36 months qualify for long-term capital gains tax, while those held for less than 36 months are eligible for Short-Term Capital Gains.
How are equity mutual funds taxed?
- Long-term capital gains of up to ₹1 lakh for each financial year are exempt from taxes.
- LTCG of more than ₹1 lakh for each financial year is taxed at 10%.
- Short-term capital gains (STCG) for each financial year are taxed at 15%.
How are debt mutual funds taxed?
- The long-term capital gains tax rate on mutual funds after indexation is 20%.
- Short-term capital gains are taxable according to the investor’s/taxpayer’s tax slab.
7 mistakes to avoid when investing in SIP
These are some of the common mistakes many new investors are likely to make when they start a SIP:
- Not boosting your SIP
Make it a point to boost your SIP funds with a lump sum amount in the same portfolio whenever you can afford to do so. When you opt for a combination of regular funds and SIP, the returns will be greater than that of a regular SIP.
- Choosing a high investment
Choose an investment amount that you can continue to invest over the years on a regular basis. By choosing a higher investment amount, you may not be able to make the investment in the SIP during a financial emergency. Ensure that the SIP amount fits your budget so that you are able to continue with the investment for the long term.
- Opting for the wrong fund
Conduct thorough and adequate research on the type of funds you would like to invest in. These should be based on factors such as your risk appetite, investment goals, expected returns and so on. Ensure that if you have long-term goals, the fund of your choice should be a long-term investment.
- Setting unrealistic goals
Know what returns to expect from your investment. Even when the market is considerably stable, most funds generate returns of 10% - 15%. However, if you assume that the fund of your choice will generate much higher returns without knowing its average returns, there may be a chance of making a loss.
- Preferring only lump sum investment over SIP
SIP is not meant only for small investors who don’t have a lump sum amount to invest. Even seasoned investors opt for investing via SIPs because they can benefit from rupee cost averaging. This means their investment can buy more units during market lows and fewer units during market highs, which is not the case when investing at one go.
- Making short-term investments
When you choose a Systematic Investment Plan, the time period of the investment or the investment tenure is a more important factor than the investment amount. Since your SIP funds grow over the years, it is always advisable to opt for a long-term SIP than a short-term one.
Frequently Asked Questions
Yes, you can invest in SIPs for long-term financial growth. The SIP amount you choose to invest at regular intervals in a mutual fund scheme of your choice will help you earn market-adjusted returns. However, ensure that the mutual fund scheme is a long-term investment for over 5 years.
SIP can start with an amount as low as ₹500 to ₹1000 per month, and you can choose the maximum SIP amount as per your affordability and investment goals.
Yes, you can skip up to three consecutive SIP installments during investment tenure. If you miss any further SIP installments, then your mutual fund investment will be terminated. But as far as possible, it is advisable to not miss any SIP payments.
SIP is a safe way to invest in mutual funds. This is because the market highs and lows do not greatly affect your investment; during a market high, your SIP will buy lesser units in the market, while more units will be purchased during a market low.
Only Equity-Linked Savings Schemes offer tax benefits of up to ₹1.5 lakhs under Section 80C of the Income Tax Act. This is applicable irrespective of whether the investment is via SIP or lump sum mode.
You can withdraw your SIPs anytime unless the fund has a lock-in period. For example, an ELSS fund has a lock-in period of 3 years while some debt funds also have lock-in periods.
You can start a SIP any time; however, during a market high, your SIP amount will buy fewer units as opposed to when the market is low.
Yes, SIPs are good for long-term investments as they provide maximum returns based on the duration of your investment tenure.
When you want to redeem your mutual fund units, you can submit an online request to your fund house. After the due process is complete, you will be able to redeem your units which will be based on the Net Asset Value on the day of the withdrawal.
Calculating SIP returns in today’s day is simple as you can use an online SIP calculator
, which will help you calculate the estimated returns on your investment based on your investment amount, investment tenure, the rate of return and some other factors.
The average returns on a SIP will depend on the type of mutual fund you choose, the market conditions and many other factors.
Once your SIP tenure reaches its end, you can choose to renew the investment through an online renewal form where you can fill in the desired SIP duration for an extension.
To reduce the SIP duration, you can submit a written application to your fund house and if you have an online account, you can submit a request online too.
When you start a SIP with a fixed sum of money at regular intervals, the market conditions do not affect your investment greatly. If the markets are high, your investment will buy lesser units and when the markets are low, more units will be purchased. This approach is known as rupee cost averaging.