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Systematic Investment Plan (SIP) in Mutual Funds - Simplified | Thasneem Banu

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Systematic Investment Plan (SIP) in Mutual Funds - Simplified | Thasneem Banu

What is SIP?

  • SIP is a method of investing in mutual funds wherein an investor chooses a mutual fund scheme and invests the fixed amount of his choice at fixed intervals.
  • It is about investing a small amount over time rather than investing one-time huge amount resulting in a higher return.

Tenure of SIP

Generally, an SIP carries an end date after 1year, 3years or 5years of investment. The investor can hence withdraw the amount invested whenever he wishes or as per his financial goals.

No Cap on Maximum SIP amount

  • The minimum amount for SIP investment is Rs.500. It gives you the benefit of investing a smaller amount. On the other side, there is no restriction for the maximum amount for SIP.
  • You can choose to invest Rs.1000,10000,100000 or even a higher amount using Systematic Investment Plan. As an investor, you have the flexibility to invest any sum of money through SIP.

Types of Systematic Investment Plans

  1. Regular SIP
    As the name suggests, a regular SIP is the simplest form. You’re required to make contributions at a regular interval, which can be monthly, quarterly or half yearly.
  2. Top up SIP or Step-up SIP
  • The Top up SIP allows you to increase your investment amount periodically giving you the flexibility to invest higher when you have a higher income or available amount to be invested.
  • This also helps in making the most out of the investments by investing in the best and high- performing funds at regular intervals.
  • For instance, you can start a monthly SIP with Rs.500 and you can ask the fund house to increase it by Rs.1000 every 12 months
  1. Flexible SIP

As the name suggests, Flexible SIP plan carries flexibility of the amount you want to invest. An investor can increase or decrease the amount to be invested as per his own cashflow needs or preferences.

  1. Perpetual SIP
  • A perpetual SIP will require you to mention the start date and not the end date or tenure for the SIP. This means the SIP will continue as long as the investor doesn’t request the fund house to stop the SIP.
  • If the investor wishes not to limit the contribution to the SIP within the maturity date and continue for a longer duration, then they can voluntarily opt for perpetual SIPs.
  1. Multi SIP
  • This allows investors to invest in multiple funds of a fund house through one SIP.
  • For instance, if you invest Rs.2000 monthly in a multi-SIP, it may split it into 4 schemes buying units of Rs.500 in each.
  • This adds to the diversification of your investment portfolio.

Isn’t it great to have returns from investment and also tax benefit from the same? If your answer is Yes, then read ahead!

Tax benefits of SIP

  • All SIP plans are not tax saving. Equity Linked Savings Scheme (ELSS) is the only type of mutual fund that qualifies for tax saving under section 80C of the Income Tax Act,1961.
  • Investments up to Rs.1,50,000 per annum are eligible for tax deduction. It is important to note that ELSS funds have a 3-year lock in period.

NAV:
Stands for Net Asset Value. The performance of mutual funds scheme is denoted by its NAV per unit.

It is calculated by:

Market value of securities of a scheme divided by Total number of units of the scheme on a given date

 

There are 3 options to choose while starting a SIP.

  1. Growth Option
  • Investors do not receive dividends from stocks that are held in funds. Instead, the dividend is reinvested into these funds, and unitholders will gain from the compounding, that is, earning profits on profit. 
  • Whenever the scheme makes profit, it's NAV rises automatically. Conversely, when the scheme suffers a loss, the NAV falls.

 

  1. Dividend Reinvestment Option
  • Dividends from stocks are utilized to buy more units of a fund. So, instead of paying out the dividend, the mutual fund purchases more units on behalf of an investor. The unit holder receives more units which are credited to the account.
  • The number of units of an investor grows over time with a dividend reinvestment option. So, the value of an investment increases at a rapid rate. However, the NAV reduces under this investment option as it is adjusted with its dividend.

 

  1. Dividend Option
  • Profits made by the scheme are not reinvested in the scheme. Instead, gains will be distributed among the investors by way of dividends; on a quarterly, half-yearly or annual basis. However, the fund doesn’t guarantee as regards the amount and frequency of dividend payment.
  • Usually, the fund manager declares the dividend only when the scheme generates profits. Dividends are paid by redeeming equivalent units of the scheme. Suppose you invest Rs 10 in an equity fund. The NAV of the fund increases to Rs 15 and the fund manager declares a dividend of Rs 2. After the payment of dividend, the NAV of the fund falls to Rs 13.


Things to consider before investing in SIP

  1. Consider your Financial Goals – Your investment goals can be long term. This may include investing for retirement, building an emergency fund or for purchase of car / house.
  2. Consider your Investment Horizon – It refers to the time frame you intend to invest in.
  3. Know your Risk appetite – To calculate your risk appetite, add up your monthly expenses and divide it by 12. The result will give you an estimate of how much money you can afford to lose.
  4. Calculate your SIP returns – Once we know our risk appetite, we can use a SIP calculator to estimate how much money we need to invest every month based on our portfolio size.
  5. Seek Financial Advice – Consult a financial advisor to discuss your goals and determine whether systematic investment plan would suit you.

 

Disclaimer

The information contained in here is for educational purpose only. Reader’s discretion advised and should seek professional advice before making any investment decision in any financial products.


References:

  1. https://paytm.com
  2. https://www.groww.in
  3. https://www.policybazaar.com
  4. https://scripbox.com
  5. etmoney.com
  6. https://cleartax.com
  7. amfiindia.com
Thasneem Banu
28-Jul-2023
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