The Indian investment scenario has changed significantly in recent years with a rise in millennial investors. They are keener to put their money in investment avenues like mutual funds and equity to achieve their goal of capital appreciation. For them, allocating funds via a Systematic Investment Plan or SIP can be an ideal way of maximising wealth.
SIP is one of the ways one can invest in mutual funds. It involves making a fixed investment in a mutual fund scheme at regular intervals, for example, monthly, quarterly, etc. The minimum SIP amount varies from one fund to another. SIP investment provides investors with an opportunity to accumulate wealth systematically and gradually.
Now that you know what SIP is, let’s find out why it is the best way to invest your savings.
Top Reasons Why SIP is the Best Investment Mode
Here you will find ten benefits of sip investment that make it a suitable way of allocating money to stocks and mutual funds:
One can start investing with small amounts
One of the most significant advantages of SIP investment over lump sum investments is that one can start investing via SIP with an amount as low as Rs. 100 per month. It is an affordable investment option for small investors and young individuals starting their investment careers without a regular source of income.
SIP provides flexibility to the investors. They can change their investment amounts and plans anytime as per their earnings. For example, if you have started a monthly SIP of Rs. 1,000, and in the coming months, your income increases, then you can also change the SIP amount or even switch to a different mutual fund scheme offered by the same fund house.
Encourages financial discipline
Individuals are reluctant savers in general. With SIP and corresponding monthly payments, one will be more aligned with their investment goals. Over time, these small investments can turn into a substantial amount of savings that one can utilize to fulfil different financial requirements. So investing via SIP will make you more financially disciplined and give you an impetus to your investing career.
Lowers average cost of units of mutual fund investments
SIPs help investors by lowering the average cost of units of various funds. The NAV or Net Asset Value of mutual funds depends on the market conditions. When markets are falling, the NAV will decrease, allowing investors to acquire higher units of mutual funds.
On the other hand, the NAV will rise if markets are rising. This causes investors to buy lower units of mutual funds. As you keep on investing in these funds over a significant period, your average cost of buying units of these funds will be lower.
Overpowers market timing hassles
Stock markets are highly volatile. It becomes tough to predict the price movements accurately. When investing through SIPs, you need not worry about how markets are performing as the regular investments will allow you to take advantage of the rupee cost averaging benefit. Moreover, you will have a balanced portfolio during your tenure.
Investment through SIP ensures compounding benefits for the investors. As individuals earn returns on their monthly SIP installments, the returns are again reinvested. This leads to a compounding of their returns, and as a result, their portfolio value grows.
As the number of investors and the volume of investment in SIPs increases, SEBI and AMFI have introduced stringent conditions for protecting the investors. Every asset management company must follow these conditions. It safeguards the investors’ interests and ensures excellent stability in the market.
The facility of online tracking
Many asset management companies have started providing online management of one’s mutual fund portfolio. Individuals investing their money in mutual funds through SIP can manage their portfolios from their homes or office anytime. In addition, they can track various details regarding their investment, for example, returns and total investment value.
Investors can also switch to a different scheme, start a new SIP or stop their existing ones through the online portal.
Avoid emotional investing
Stock markets are highly volatile. It is straightforward for investors to make impulsive decisions while reacting to the pulls and pressures of their needs. It does not provide expected results, and investors keep making mistakes leading to negative returns. SIP involves regular investments. It protects the investor from emotional investment as individuals keep investing their funds irrespective of the market conditions.
One of the most significant advantages of investing through SIP is that it allows investors the benefit of stopping their SIPs. There is no penalty or charge for abruptly stopping the SIP installments. Investors can skip their SIP payments for a maximum of 3 months. This facility helps them during a cash crunch.
So these are some of the reasons why SIP is one of the best ways to invest your money.
Types of SIPs
The following are the different types of investment plans:
A top-up SIP provides the option of increasing the investment amount at regular intervals, for example, six months. For example, let’s say an individual has started his SIP at Rs. 6,000 monthly, and he can increase the investment by Rs. 1,000 after six months. His SIP installment after six months will be Rs. 7,000, and after another six months, it will be Rs. 8,000. It will continue like this till the investor wants
It is also known as Flexi SIP. It allows investors to adjust their investment amount as per market conditions. In this case, you can increase your investment amount when the market falls and decrease your investment amount when markets rise, leading to a gainful acquisition of mutual fund units at affordable costs. You can also reduce your investment amount when there is a lack of funds with you.
This works on the trigger principle, i.e., you can start your SIP investment when the NAV of some specific funds falls below a trigger point. For instance, your funds will automatically be invested via a SIP when the NAV of a mutual fund falls below a price decided by you.
All investors must be aware of this type of SIP. Every SIP comes with a start and an end date. However, when investors do not mention or fix their end date, the SIP turns into a perpetual SIP. The default end date for a perpetual SIP is 2099. Investors can still opt for an end date by submitting a written application to the respective fund houses.
Risks of Investing via SIP
Here are risks you will encounter while investing through SIP:
Chances of negative return
Mutual funds are always subject to risks prevalent in the market. The performance of the funds is guided by the ups and downs of the markets; you cannot be sure about the returns you will receive. Therefore, there is always a risk of lower or negative returns. However, the longer the holding period of mutual fund units, the lower the risk.
Downgrade of security
A credit rating agency regularly reviews the market securities of companies or governments depending on their financial position. Suppose they downgrade the rating of a bond or debenture issued by a company or government. In that case, the value of such securities will fall, leading to an overall fall in the NAV of the associated mutual fund.
A fund manager handles every mutual fund. These fund managers have professional expertise in handling mutual funds. However, they are not immune to errors and miscalculations of situations. If a fund manager makes a wrong decision, it will directly affect the NAV of a mutual fund.
How Do SIPs Work?
When you invest in mutual funds via SIP, you receive specific units of mutual funds based on the amount you have invested. Therefore, timing is not essential while investing through SIP, as you can take advantage of both bullish and bearish markets.
When the markets are on the lower side, you can purchase more units of the fund, and when they are rising or bullish, you will receive lower branches. As time goes on, the average cost of buying mutual fund units is lower. The Net Asset Value of all mutual funds gets updated daily, so the cost of purchasing the units will not remain the same when paying the installment.
Things to Consider Before Investing via SIP
You must consider the following things before investing through SIP:
An individual’s investment goals must be aligned with the objectives of the fund. Individuals must thoroughly consider what the fund is offering and whether it will be able to fulfill their financial goals.
It would help if you went for SIP investment only after considering your risk appetite. Make sure to invest via SIP only in a fund aligned with your risk-taking capability. If you are a risk-averse investor, you must choose to invest in a scheme with no or minimal risk. On the other hand, if you are an aggressive investor, you can go for risky mutual funds, thereby having higher returns.
Fund manager’s performance
One must also consider the performance of the fund manager responsible for handling the fund. The manager’s past returns and ability to make intelligent and strategic decisions must be considered before investing through a SIP.
Lump-Sum vs. SIP: A Comparison of the Two
Here are some comparison parameters between the two:
Mode of investment
The significant difference between SIP and the lump sum is the manner of investment. Lump-sum involves a one-time payment in a specific scheme. Investors will receive units of mutual funds upon making complete payment upfront. On the other hand, SIP involves recurring payments at fixed intervals like weekly, monthly, quarterly, etc.
In the case of lump-sum investments, you are investing a bulk amount upfront. So, the timing of entering into a scheme becomes crucial. For example, you must invest when the markets are falling to acquire a higher number of mutual fund units. For investment through SIP, the timing is not essential as you will make recurring payments, and it will lower the average investment cost over time.
SIPs are very friendly for small investors as the investment amount is meagre. They can start a SIP with an amount as low as Rs. 100. However, the minimum investment amount for a lump sum is very high and not affordable for many investors. For most schemes, the lump sum investment starts at Rs. 5,000.
Risk of losses
SIP investments are recurring in nature. These are capable of facing solid headwinds in the markets. In case of a market crash, SIPs can protect or mitigate losses. On the other hand, lump-sum investments in mutual funds can incur heavy losses during a stock market crash.
From the above comparison, we see that SIP investments are a more stable and reliable form of investment than lump sum ones.
Taxation of Mutual Funds
In the case of equity mutual funds, when the holding period of the units is less than 12 months, the gains arising from these are taxable under STCG at 15%. However, if the holding period is more than 12 months, the gains are termed LTCG and taxed at 10%. In these cases, gains of up to Rs. 1,00,000 are exempt.
Debt mutual funds also attract taxation on capital gains. When the holding period of the units of a debt fund is lower than 36 months, then profits arising from the investment are taxable at respective tax slabs. When the holding period is more than 36 months for debt mutual funds, the gains are subject to long-term capital gains tax at 20% after considering the indexation benefit.
Note that investments through SIP allow tax deductions of up to Rs. 1,50,000 under Section 80C of Income Tax Act. However, this deduction is only available if you have invested in ELSS, i.e., the Equity Linked Savings Scheme.
SIP investment is one of the ways to allocate funds to mutual fund schemes. It provides flexibility and offers stable returns for investors. Moreover, investing via SIPs for an extended period leads to accumulating a significant corpus that you can utilise to achieve your investment goals.
Frequently Asked Questions
How can one invest in SIP online?
Start a SIP online by registering and creating an investment account with a fund house. One needs to complete the KYC verification through the website of a fund house or an intermediary. After the KYC verification is successful, individuals can link their bank account with the investment platform and allocate their savings via SIP.
How can you redeem your SIP investments online?
To redeem your mutual fund units online, you need to go to the respective fund house’s website and initiate a request for redemption. After the request is processed, you can redeem the units at the prevailing NAV.
Is SIP investment safe?
Yes, the payments made through SIP to buy mutual fund units are completely safe and secure. Stringent SEBI regulations regulate the fund houses and intermediaries, and any non-compliance can lead to heavy penalties.
What is a one-time mandate in SIP?
OTM or one-time mandate allows automation of SIP payments. One needs to fill out an OTM form with their respective banks to avail of this facility. Banks will regularly credit the SIP amount on predefined dates. It makes the process smooth and hassle-free.
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