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Systematic Investment Plan (SIP) - Types of SIP, Features, Benefits

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Gaurav Seth
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SYSTEMATIC INVESTMENT PLAN (SIP)

INTRODUCTION

A Systematic Investment Plan (SIP) is a concept and one of the methods in investing in mutual funds. It can be termed as an investment in MFs periodically with a certain amount of money in a disciplined manner. This offers an investor the flexibility to invest according to one’s financial goals and create long-term wealth by investing a small sum through a long tenure. Investors having regular cash flows or fixed income can go forward with doing SIPs to meet their financial goals. Also, SIP is the best alternative to get into the habit of saving & investing regularly. Moreover, the benefits of compounding can do wonders in the long run. It also helps to avoid timing the market and is least affected by the market volatility on long-term investments due to its benefit of rupee cost averaging. 

HOW DOES SIP WORKS?

Once an investor applies for a SIP plan, the amount is automatically debited from his bank account and invested in the fund he has bought. In 2-3 days, he will be allocated the units of MF depending on the NAV of that fund. With every installment in a SIP, additional units are added to the account depending on the market rate or NAV of the fund. With every installment, the amount being reinvested is more and so is the return on those investments. 

TYPES OF SIP

1.  Flexible SIP:

This type of plan allows an investor to increase and decrease the investment amount as per the availability of cash. Through this, if an investor face cash crunch, paying one or more installment can be avoided. Similarly, if an investor is willing to make a bigger contribution to his account, he can do so.

2. Top-up SIP:

This plan allows investors to periodically increase the amount. It also means that investors can make the most of SIP investments by contributing to well-performing MFs at specific intervals. An increase in investment can be done with an increase in income or receiving of bonus. 

3. Trigger SIP:

This SIP offers a facility which allows automatic redemption (part/full) or switch to another scheme as specified by the investor on the occurrence of a pre-defined trigger point. Some of the examples of trigger alerts could be in case of rise or fall in NAV, index level movements (upside/downside), capital appreciation & depreciation, and others.

The chosen trigger will activate the transaction of buy, sell or switch if it hits the trigger point. 

4. Perpetual SIP:

If an investor does not opt to enter the end date on the mandate, it can be classified as a perpetual SIP. The perpetual SIP doesn't have any fixed tenure and can be continued until the time the investor wishes to invest.

 Nevertheless, it is always advised that an end date must be set so as to promote discipline and goal-based investment. 

WHEN TO INVEST IN SIPs?

SIP investment can be initiated anytime during the year with the ideal plan for the investor. An ideal SIP is the one that suits the goal of the investor in an apt way. Long-term objectives can be achieved by investing in equity-based funds for a longer horizon and short-term objectives can also be achieved by making a wise choice of funds across the categories of debt & hybrid funds as per requirements. Therefore, there must be a suitable time horizon within which an investor should initiate a SIP, and as it is said, the sooner the better. 

BENEFITS OF SIP

1. High Returns:

Most often, SIP plans offer nearly double returns as compared to the traditional FDs and RDs. These help to beat inflation in a much more efficient way. They also help to deal with the market volatility by investing regularly at fixed intervals.

2. Rupee Cost Averaging:

When an investor starts a SIP, most often a fixed amount is invested at regular intervals with discipline. This allows to purchase more units when the markets are low as the NAV of the mutual fund will be low at that point of time. Identically, when the markets are high, a lesser number of units are allotted. This phenomenon is called rupee cost averaging. 

3. Power of Compounding:

One of the ideal ways to accumulate wealth and create a large corpus is to invest regularly. A small amount invested on a regular basis with discipline can produce very good returns over the long term. The benefit of compounding assures good returns in long term.

4. Hassle-Free:

SIP is one of the most hassle-free and convenient modes of investment. Here, investors can start making the investment from an amount as low as Rs 100 in a disciplined and phased manner. In addition, the investors can also authorize a mandate to the bank which will automatically pay for the SIP installments. 

HOW TO CHOOSE IDEAL SIP?

1. Fund House:

Before opting for a plan, having a glance at the reputation of the fund house is really important. The performance of the fund house will give an estimation to investors about how well the fund house has been in handling the adverse market scenarios without letting the investors lose money. 

2. Personal goals:

Investors’ personal vision and goals play a very important role in choosing the fund for a SIP. An investor can opt between equity funds, debt funds, and hybrid funds as per his financial position and feasibility. Also, factors like the amount to invest, tenure, etc also hold equal importance.

3. Duration of SIP:

This factor is important to consider from the view angle of risk, tax, and return. While making an investment, the investor should vouch for how the fund performed across different tenures in different conditions.

4. Asset Under Management (AUM):

AUM is considered to be an apt benchmark while opting for a fund. Nevertheless, it doesn’t indicate that the funds below a specific AUM are not good as the ideal AUM varies from category to category. 

TAXATION ON MUTUAL FUNDS

In SIPs, the taxation is different for debt mutual funds and equity-based mutual funds.

Here are the taxation rules:

On Debt-Oriented 

  1. The STCG(Short Term Capital Gains) are included in the income and taxed as per the applicable income tax slab to the investor.
  2. LTCGs on debt-oriented hybrid funds are taxed at the rate of 20% after indexation benefits.

For debt, LTCG is applicable when you hold the securities for more than 3 years and STCG is applicable when it is held for less than 3 years.

On Equity-Oriented

  1. STCG is taxed at 15%.
  2. LTCG of more than Rs. 1,00,000 are taxed at 10% (without indexation).

For equity, LTCG is applicable when you hold the securities for more than 1 year and STCG is applicable when it is held for less than 1 year.

Tax benefit on SIPs is only eligible for the investments made in ELSS (Equity Linked Savings Schemes). If the investors invest in government-approved tax saving schemes like ELSS, they can claim tax deductions of up to Rs.1.5 lakhs under Section 80C of the Income Tax Act.  

More Information:

RD vs SIP - Risk, Returns, Benefits, Tenure, Comparison, Which is Better Investment
What is Rupee Cost Averaging - Meaning, Calculation, Example, Importance
SIP vs STP vs SWP - Suitability, Tax Impact, Advantages
SIP vs Mutual Funds - What Is The Difference Between SIP & Mutual Fund
Difference Between SIP and Lump Sum
Right Time to Start SIP in India

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