10 Key Things To Know About SIPs

SIP stands for Systematic Investment Plan. SIP is an organized way of investing regularly in a mutual fund. Many times we don’t have large amounts of money to invest. When you set up a SIP with any mutual fund, your account is debited a fixed amount every month. This amount is invested in a mutual fund of your choice. Over a period of time, your investments accumulate and keep growing.

10 Things To Know About SIP

One must know the following 10 aspects about systematic investment plans (SIPs) - 

• Is SIP safe or not?

SIP is a very safe method to invest in mutual funds. If you invest in a mutual fund lump sum, depending on the market condition, you could end up paying a very high price for a mutual fund. To avoid this, you should invest in mutual funds when the markets are not overvalued. This obviously requires a good knowledge of the markets. This is called timing the market.

• Are SIP returns taxable?

Depends on the type of mutual fund you invest in and when you redeem your investment. Returns from equity mutual funds have no tax on them if redeemed after a year of investment. If you redeem before a year, you will have to pay a tax of 15% on your gains. Tax in case of SIP is calculated on individual SIP investments. This means the tax will be calculated for each SIP instalment separately.

• Can SIP be stopped?

Yes. Unlike fixed deposits (FD) and recurring deposits (RD), you can stop an SIP any time you want. After stopping paying for an SIP plan, you can either choose to redeem your money from the mutual fund or continue to remain invested in the fund.

Must read: Types Of SIPs In India    

• Can SIP save tax?

If you use SIP to invest in tax saving ELSS mutual funds, you can save tax too. You can claim tax deductions of up to ₹1.5 lakh under Section 80C by investing in ELSS mutual funds. To take benefit of ELSS mutual funds via SIP, make sure the total of all your SIPs in a financial year is ₹1.5 lakhs. Investing more than ₹1.5 lakh won’t give you any additional tax benefit. You can however still invest in an ELSS mutual fund if you feel it is a good investment.

• Can SIP amount be reduced/increased?

The procedure to do so is very complicated. But there is a solution to this problem. You can simply start a new SIP in the same fund with the increased amount. If your mutual fund is not accepting new SIPs and you cancel your SIP, you will not be able to start a new SIP in the same mutual fund. In such cases, it is advised that you not cancel the existing SIP but start a fresh SIP in a different mutual fund with the extra money that you have.

• Can SIP be started online?

Yes, you can easily start a SIP online. SIPs do give you the facility to start investing in it online. Hence you can start doing the same at the ease of your homes. 

• Does SIP have a lock in period?

If you are investing in an open-ended mutual fund, there will be no lock-in period for your SIP as well. It completely depends on the mutual fund you invest in. Some mutual funds do have a lock-in period. ELSS mutual funds have a lock-in period of 3 years. Many other mutual funds have lock-in periods too. Mutual funds that have lock-in periods are called close-ended mutual funds.

• Does SIP have an exit load?

The exit load of a SIP depends entirely on the mutual fund. If the mutual fund specifies an exit load for a period, then there will be an exit load on the SIP also. Most equity funds have an exit load of 1% if redeemed before a year from investment and no exit load if redeemed after a year. The exit load is calculated upon the value being redeemed.

• Is SIP better than RD?

SIP has the capability to give much higher returns than RD. The return you get on your SIP depends on the mutual fund you invest in. There are debt mutual funds that are considered low risk and then there are equity mutual funds that are considered high risk. Unlike RD, the rate of return isn’t fixed in case of mutual funds.

• Is SIP good for the long term?

Yes. In fact, it is better to invest in SIP for the long term. Instead of waiting and accumulating money to invest, you start investing whatever amount you are able to save. This way, your money is always invested. Not just that, by investing for the long-term, you are ensuring that short-term market volatility does not affect your investment.

Conclusion

Which SIP you invest in depends on your needs. If you are willing to take risks, you can check out small and mid cap mutual funds. On the other hand, if you want moderate risk, you can check out large cap mutual funds. You can also check out debt mutual funds if you want to be exposed to very low risk.

Also read: How To Invest Through SIP?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.