Investing in mutual funds with discipline is possible with a Systematic Investment Plan (SIP). SIP enables you to consistently invest a set amount (monthly, weekly, or quarterly) in a mutual fund plan, rather than making a lump sum investment.
Consider it similar to a recurring deposit, but instead of earning fixed interest, your money is invested in the market, allowing you to profit from compounding and rupee-cost averaging over time.
Here are the 7 important things you need to understand SIP:
1. What is SIP?
The acronym for Systematic Investment Plan is SIP. SIP is a structured method of making consistent investments in mutual funds. We frequently lack significant sums of money to invest. A specific amount is deducted from your account each month when you set up a SIP with any mutual fund. This sum is put into the mutual fund of your choice. Your investments accumulate and continue to grow over time.
A fairly secure way to invest in mutual funds is through SIP. Depending on the state of the market, you can pay a very high price for a mutual fund if you invest a big sum. When the markets are not overpriced, you should invest in mutual funds to prevent this. Obviously, this calls for a solid understanding of the markets. We call this "timing the market."
When investing through SIP, you don't have to worry about timing the market. You make a tiny monthly investment in SIP. The price will be high in certain months and low in others. The price you pay will be an average of high and low if you take the long view into account. Therefore, if you invest through SIP, you won't pay a high or overpriced fee for the mutual fund. We refer to this as rupee cost averaging.
3. Are returns from SIPs taxable?
Depending on the kind of mutual fund you choose and the date of your investment redemption.
If redeemed after a year of investment, returns from equity mutual funds are tax-free. You will be required to pay a 15% tax on your earnings if you redeem within a year.
In contrast, debt mutual funds have an indexation benefit if you redeem them after three years of investing, and they are taxed at a rate of twenty per cent. The tax is determined by your income tax slab if you redeem within three years.
Note: Individual SIP investments are used to calculate tax in the event of SIP. This implies that the tax will be determined independently for every SIP instalment.
As an illustration, suppose you have a ₹1000 monthly SIP that begins in January 2018 and runs through December 2018. Assume for the moment that you have made an equity mutual fund investment. Therefore, if you redeem after a year from the investment, you won't be required to pay taxes. Therefore, you should redeem your January 2018 investment after a year, or after January 2019, to avoid paying taxes. Similarly, in order to avoid paying taxes, the instalment you paid in February 2018 should be redeemed after February 2019.
4. Is it possible to halt SIP?
Indeed. An SIP can be terminated whenever you choose, in contrast to recurring deposits (RD) and fixed deposits (FD). You have the option of either redeeming your money from the mutual fund or staying invested in it once you stop making payments on a SIP plan.
5. Can SIP reduce taxes?
You can also avoid taxes if you use SIP to invest in tax-saving ELSS mutual funds. Investing in ELSS mutual funds allows you to claim tax deductions of up to ₹1.5 lakh under Section 80C.
Make sure the amount of all your SIPs throughout a fiscal year is ₹1.5 lakhs in order to profit from ELSS mutual funds through SIP. You won't receive any more tax benefits if you invest more than ₹1.5 lakh. However, if you think it's a wise investment, you can still buy an ELSS mutual fund.
Example 1: If you begin a SIP of ₹12500 in April 2018 and continue until March 2019, you will have invested ₹1.5 lakh in the 2018–2019 fiscal year. As a result, you will qualify for a ₹1.5 lakh tax relief for the 2018–2019 fiscal year.
Example 2: Let's make a minor adjustment to the previous example. Let's imagine you started in May 2018, which is one month later than April 2018. Your SIP's final payment is due in April 2019, which is outside of the 2018–2019 fiscal year. Your entire investment for the 2018–2019 fiscal year would then only be ₹137500. Thus, you would qualify for a tax benefit of only ₹137500.
6. Can the SIP amount be changed?
The process for doing so is extremely difficult. However, this issue has a remedy. You can easily use the extra money to start a new SIP in the same fund.
For illustration, suppose you wish to raise your monthly SIP from ₹10,000 to ₹12,000. In the same mutual fund, you can easily begin a new SIP with a larger sum.
Note: For a variety of reasons, some mutual funds cease to accept new SIPs, albeit this is uncommon. You won't be able to start a new SIP in the same mutual fund if you cancel your current one and your fund isn't taking new SIPs. In these situations, it is recommended that you use your excess funds to establish a new SIP in a different mutual fund rather than cancelling the current one.
7. Is it possible to initiate SIP online?
Indeed, initiating a SIP online is quite simple. Make sure you have registered on Groww. Before beginning an online SIP with Groww. After uploading the required paperwork (bank statement, proof of address, and PAN), select the mutual fund you wish to begin a SIP in. Visit the groww.on the mutual fund page and adhere to the guidelines.
Investors must keep up with fund performance, market movements, and economic factors while making share market investments. The SIP portfolio is kept in line with the investor's changing objectives and market conditions by routinely examining and modifying it. By empowering investors to manage the intricacies of stock markets, a knowledgeable and disciplined approach to systematic investment strategies promotes long-term wealth creation and financial well-being.
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