Most of you might be investing in Mutual Fund through SIP. However many of us might not be aware on how various aspects of Systematic Investment Plan (SIP) in Mutual Funds. Many of us might not be aware of various types of SIPs and how mutual funds are taxed in medium to long term. In this article we would provide complete guide on Systematic Investment Plan (SIP) in Mutual Funds and provide various facts about it.
What is Systematic Investment Plan (SIP) in Mutual Funds?
If you are already aware of SIP, you can skip this section.
SIP is a systematic and planned strategy of investment in which an investor invests a certain predetermined amount in a specific mutual fund scheme at regular intervals in order to create wealth. Asset Management Companies (AMCs) manage these SIPs and they invest in stocks, bonds, government securities, cash or other assets depending on the mutual fund objective and investment strategy.
Here is the short video about SIP in Mutual Funds.
Credit: Yadnya Investment Academy
20 FAQs about Systematic Investment Plan (SIP) in Mutual Funds
We would cover complete guide on Systematic Investment Plan (SIP) through Q&A and provide various facts about it.
1) What is the minimum investment one can start SIP in mutual fund schemes?
All fund houses have different minimum investment amount. Recently many mutual fund have reduced minimum amount to Rs 100 however a few with a minimum of Rs. 500.
2) SIP vs lump sum investments in Mutual Funds, why SIP scores high?
SIP and lump sum are the two different strategies of investment. There are many factors that play a big role in this decision. Your current age, the purpose of investing, type of mutual fund selected, availability of funds and market condition are the few factors that need to be considered. However, SIP has a niche over lump sum investment because in this form of investment the risk factor spreads over a period of time and the investor gets an average and consistent return.
3) How SIP Mutual Funds are taxed?
SIPs are taxed in FIFA pattern i.e. first in first out pattern. If you redeem a part of an investment made through SIP, the earlier SIPs are redeemed first and the later SIPs are redeemed later. In order to qualify for long term capital gains, each of your SIPs in invested corpus must complete at least one year of time. Long term capital gains over Rs 1,00,000 is taxed at 10% and short term capital gains are taxed at 15%. Understanding how SIP Mutual Funds are taxed would help you to plan your taxes.
4) What are various SIP options being floated by mutual fund AMCs now?
There are few innovative variant options available in SIPs now
Step-up SIP- in it, the amount of investment increases automatically at a pre-defined rate and period.
Pause SIP- any existing investor who has an ongoing SIP will have an option to pause SIP at any date by undergoing the prescribed procedure.
SIP amount change- in it, the investor can change the amount of SIP without canceling the ongoing SIP.
Any date SIP- the investor can choose any date of the month to give his installment of SIP.
5) SIPs in mutual fund should be invested for 5-10 years – How far this is true?
SIP is a systematic investment which helps to grow your wealth in a long-term. The power of compounding of interest comes into play where you start earning good returns if you remain invested for a long time. The risk of up-downs of the market also spreads out over a long period of time.
6) My SIPs in the last 2 years has delivered negative returns, but my financial advisor still asks me to invest for the long term, why?
SIPs make sure that your investments are spread over a period of time. SIP investment may make losses if the market declines steadily after you begin your investment but as the investment goes in small installments and spread out over time, you get to average on investments at lower levels and when the market bounces back it starts fetching you returns in the long term. What your financial advisor view is correct. However, one need to check they are investing in best mutual funds in India. If you are investing in wrong mutual funds, no point in waiting for long term.
7) How can I invest in SIP mutual funds offline?
To invest in SIP mutual funds offline, you need to search a mutual fund advisor or broker in your locality. The broker will guide you through the entire procedure and formalities regarding the mutual funds. However, it is difficult to track the investmetns if these are in offline mode. We advice you to invest online even if such funds are recommended by your broker or mutual fund advisor.
8) How can I invest online in mutual funds SIPs through intermediary portals?
There are certain independent web portals that provide the services to mutual fund investors to transact online at no extra cost. Most of the banks have a tie-up with them to facilitate easy transfer of funds at the time of investing. You need to create an online account with them after which you can have access to the entire mutual fund platform. These portals offer several benefits like tracking tools, analysis tools, zero-cost advantage etc. which helps to build a good portfolio. These intermediary portals include, ICICIDirect, FundsIndia, Scripbox, Groww.in, Upwardly etc.,
9) How do I invest online without dependency with any MF broker?
As a new investor, there is one-time documentation called KYC (know your customer) which one needs to complete. If you have an Aadhar card and online banking facility, then you can start investing in mutual funds with e KYC. Here you can invest up to Rs. 50,000 per annum per fund house. One can invest online directly through the website of the mutual fund company.
10) Can I invest through mutual fund specific portals like Scripbox, Upwardly, Groww.in, if yes, what benefits I would get it?
Scripbox, Fundsindia, Upwardly are all mutual fund platforms where one can invest in mutual fund schemes with zero transaction fees. These websites even recommend a portfolio which would help you to achieve your financial goal. One can invest in their own funds. Some portals are offering investing in direct plan of mutual funds with some transaction fees.
11) When should I stop my SIP?
SIP should be stopped only in three circumstances. Firstly, if you realize that you have invested in a wrong type of fund that would not help you in achieving your financial goal, secondly if the fund you are investing in is a chronic underperformer (as compared to its benchmark) and finally if you get closer to your financial goal, you can stop SIP.
12) Which SIP date is best for investment in a month?
You might be thinking which is the best date for SIP Mutual Funds to invest. We did this analysis few months back by taking few funds and for entire month with various dates. We found that there is no good date for investing in mutual funds through SIP. One may choose a date closer to his salary day so that he may never run short of funds in the account. Still, if you wish to choose a date, let your SIP hit your account between the 1st to 10th of the month.
13) Should I start my SIP in mutual funds in bull phase or bear phase and why?
The idea of investing in SIP is to avoid the timing of the market. It can be started at any given phase of the market. The purpose of SIP is to avoid timings in the markets and start investing regularly with a purpose.
14) I want to invest in small cap or midcap only, is there any harm in doing this?
If you wish to invest in small-cap or mid-cap, invest via SIP only because small cap and mid cap are extremely volatile. If the market falls, the risk is spread through a long stretch of time and continuing with SIP will average out the buying prices.
15) I opted for 10 years SIP, but want to cancel in 6 months, can I do it?
Yes, you can stop or cancel your SIP before the pre-determined tenure. To cancel the SIP, just download the SIP cancellation form from the company’s website or obtain it from your broker or cancel it from your online login. You need to fill the details and submit it to Registrar of fund/distributor/agent/ mutual fund house. After submitting the application, the request is processed in about 20 to 30 days to stop SIP.
16) Can I stop SIP after a few years, but would continue to hold these mutual fund units?
Yes you can. You need to cancel the SIP as indicated above as and when you want to do it. Units accumulated till such time would continue to grow if you stay invested for long term.
17) I would track stock market daily, should I opt for direct stocks or SIP Mutual Funds?
AMCs always invest in a diversified portfolio in the stock market depending upon the nature of the fund, but it never relies on one industry or stock. If an individual invests in the market, they are highly exposed to the volatility of the market and individual stocks whereas AMCs never put all his eggs in a single basket. If you can do good analysis of stocks and want to pick-up 5-10 good quality stocks, you can always do that. However, if you want someone else to do this, you can invest in SIPs of mutual funds.
18) Can a minor start SIP in Mutual Fund?
Yes, minors can invest in mutual funds as there is no age specified to invest in mutual fund. With a parent or a legal guardian selected as guardian, a minor can create a portfolio, be the first sole holder and invest in it.
19) My income is fluctuating as I am a sales person, how can I plan my SIP in mutual funds?
If your income is fluctuating, it is difficult to determine a fixed amount of investment at a regular interval. If you have fluctuating income with some minimum wage, make that base as your minimum investment. If the fluctuation is quite high like you earn Rs 1,00,000 in a month and for next 3 months, you are barred of money, then you should invest in a liquid or an ultra-short duration fund with instructions to move that money over a period of time to equity funds through SIP.
20) Finally, “kya mutual funds sahi hai”?
SIPs have emerged as a powerful tool for investment in the past few years. It makes the investment and wealth creation so systematic that stayed invested meticulously and wisely, one is ought to accomplish his financial goals in the long run. The AMCs present a wide range of schemes with a different combination of type of investments so that investor can choose his fund according to his suitability, financial goals, and risk appetite. Yes Mutual Funds sahi hai, provided you do enough research and invest in good mutual fund schemes based on your risk appetite and tenure and stay invested for long term.
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