Learn more about SIP

Mutual Funds | admin | January 28, 2011 at 9:58 am

Keep sufficient balance in your bank

To start an SIP in a mutual fund, you need to give an ECS mandate or post-dated cheques to the fund house. But that’s not the end of it. You need to make sure you have sufficient funds in your bank account on the date of investment. Fund houses are usually quite lenient in these matters and will overlook one or two instances of an SIP cheque bouncing. But if it happens three times in a row, your SIP will be cancelled for good. To restart it, you will have to do the paperwork all over again.

Useful for certain asset classes

You can invest through SIPs in practically all asset classes—equities, debt, gold and even real estate. After all, your home loan EMI is an SIP in real estate. But SIPs work best in volatile asset such as equities. That way you are able to average out your purchase price over the long term. You don’t really need to take the SIP route when investing in the debt market where the fluctuations are minimal.

“Also, one can consider investing systematically in gold, which is another asset class with some volatility and is a good hedge against inflation,” says Suresh Sadagopan, a Mumbai-based certified financial planner.

Each SIP is an individual investment

Like each EMI of a loan, each instalment of your SIP is a separate investment and treated individually while calculating tax and exit loads. If you started an SIP in an equity fund two years ago and withdraw the entire amount today, the SIPs that were made more than 12 months ago will not attract any tax. However, the profits from the past 11 SIPs will be liable to 15% short-term capital gains tax because they have not yet complted a full year.

So, even though your might have started the SIP several months ago, each instalment must complete a year to escape the tax net. Also, these 11 instalments would also be slapped with an exit load because they are being withdrawn before a year.

This also holds true for ELSS funds, wherein each instalment has a lock-in period of three years. So after three years of starting an SIP in an ELSS fund, you can withdraw units of only the first SIP. The next month, units of the second SIP become free from the lock-in and so on.

Monthly option is best

In the past few years, SIPs have evolved significantly. Apart from monthly and quarterly options, you now have the option to enter the market at fortnightly, weekly and even daily intervals. However, a monthly option still works best because of the operational ease it provides. While daily and weekly SIPs even out the fluctuations well, they add to an investor’s paper work.

Also, our cash flows are monthly and we plan most things on a monthly basis, so it’s easier to keep money aside at that interval. The quarterly mode takes too long. By the time the trigger date comes in you might have used all amount.

What’s the right amount

Some mutual funds allow investors to put in as little as Rs 50 a month through SIPs. That may appear tempting but won’t help in wealth creation. Even if your fund churns out good returns and you remain invested for the long term, the small size of the SIP means you won’t accumulate a significant amount.

Sure, the amount of investment is defined by the investible surplus that an individual has. But don’t opt for a small SIP just because it is being offered by a mutual fund. Assess the size of your financial goal and then save accordingly.

Source: Economic Times