Things you should know about Systematic Investment Plan

Have you found yourself wondering is SIP safe? A systematic investment plan or SIP is a great instrument to build your exposure to a variety of mutual funds such as equity funds, hybrid funds and debt funds. Here are the things you must know about SIP, including the answers to the burning questions of is systematic plan safe and should one invest in SIP.

What is SIP?

The term SIP is the abbreviated form of Systematic Investment Plan, which is a calibrated and systematic means of investing in a mutual fund, in a regular manner. SIPs help you start investing in mutual funds even when you may not have a large corpus to park in such schemes. With an SIP, you can invest a fixed, pre-decided amount in mutual funds, each month, and meet your financial goals in a systematic way.

Is SIP safe or not?

So, is SIP safe? Firstly, since SIP is a means to participate in the market, every SIP does face a certain amount of risk and this amount depends on the mutual fund scheme you choose. For instance, a debt fund SIP can be considered safer than an equity fund SIP, given the underlying risk in these assets. However, when compared to a lumpsum investment, an SIP is quite safe as it enables you to purchase more units in a low market scenario and vice versa, thus ensuring optimal rupee cost averaging. Further, on a longer time scale, markets have always performed positively, despite short-term fluctuations and therefore, a long-term SIP can be considered comparatively safe.

Are SIP returns taxable?

The taxation of mutual fund returns depends on the type of fund and the duration of your investment. For equity mutual funds, LTCG @10% will be applicable for investment held over a year. However, if you redeem it before a year, a 15% tax is applicable on your gains. Debt mutual funds, on the other hand, are subject to your income tax slab. For SIP, the tax is calculated separately for each SIP instalment, based on the redemption duration.

Can SIP be stopped?

You can stop your SIP at any time, based on your financial condition and outlook, unlike a bank fixed or recurring deposit. Once you stop your SIP, it is up to you to either redeem your units or remain invested in the scheme.

Can SIP save tax?

Many people use SIPs in equity linked savings schemes or ELSS funds to save on tax since you have the option of claiming a tax deduction of up to INR 1.5 lakhs on such investments. However, if your ELSS investment exceeds INR 1.5 lakhs, you will not receive further benefits.

Can SIP amount be reduced/ increased?

If you wish to increase your SIP amount, you can do so by either editing your SIP instructions or initiating a new SIP in the same fund with the higher amount. Separately, you can also use the edit function to reduce your SIP outflow. These instructions can be entered in quite easily, making SIPs a very flexible instrument.

Can SIP be started online?

Yes, it is very easy to start your SIP online and you can do this by logging into your investment platform or application. You can also use the website of the mutual fund company you wish to invest in. After completing your Know Your Customer verifications, simply choose the scheme you wish to start your SIP in and enter the necessary details such as the amount and frequency of the SIP.

Does SIP have a lock in period?

The presence of a lock-in period for your SIP in an open-ended mutual fund is entirely determined by the specific mutual fund you choose. Please note that certain mutual funds, such as ELSS funds, come with a mandatory lock-in period of 3 years. These types of mutual funds are often referred to as close-ended mutual funds. In contrast, many other open-ended mutual funds do not impose any lock-in period, allowing you to redeem your investment at any time.

Does SIP have an exit load?

Whether or not your SIP will attract an exit load will depend upon the mutual fund house and scheme you choose since these rules vary across fund houses. You can get the exit load information from the scheme’s documents, before you start investing. Usually, equity funds indicate a 1% exit load, when the units are redeemed before a year from the date of investment.

Is SIP good for the long term?

Certainly, a SIP is an excellent way to build your wealth over the longer term, without exceeding your budget. Further, it enables you to meet your financial goals effectively, if you plan your SIP well. You can also benefit from rupee cost averaging and compounding interest, when you invest in SIP for the long term.

Is SIP and mutual fund the same thing?

You can either invest lumpsum in mutual funds or you can invest via the SIP route. SIPs can be more systematic in nature ensuring that you remain disciplined in your investment journey.

Which SIP to invest?

The answer to this question will depend on your investor persona since the right SIP for you can only be determined after taking your risk appetite, return requirements and time horizon into consideration.

Now that all your SIP related questions have been answered, you can start investing with SIPs right away and realise your financial goals in the most effective manner.

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