Every salaried employee, especially the ones working in private or unorganized sector, strives hard to make the most out of their surplus money. This class of people, commonly known as “AAM NIVESHAK”, or mango investors, wish to plough money into what will reap them bigger and better results in comparison to plain old fixed deposits (especially given the ever decreasing fixed deposit rates which have dipped down to almost 7.5% this year). This article will try to impart you with comprehensive knowledge regarding SIP (Systematic Investment Plan) investment.
What is a Mutual Fund?
Mutual funds are kind of portfolio investments or funds which are managed by the professional fund managers. These fund managers usually have a predefined plan for asset allocation and also instruments to be invested in. Mutual Funds are segregated into units and valued at NAV (Net Asset Value). NAV is nothing but the total market price of all units divided by a total number of units. NAV keeps on varying depending on the market prices of underlying assets.
Types of Mutual Funds
There are two types of Mutual funds – Growth Plan and Dividend Plan. Growth plan does not offer any return during the lifetime until maturity or redemption, thus giving investors a compounding effect advantage. However, dividend plan distributes periodic dividends in the form of units. Even though it ensures regular income, dividend reduces NAV of that Mutual Fund, which in turn affects its wealth building feature.
What is SIP (Systematic Investment Plan)?
SIP is nothing but a way of investing in Mutual Funds periodically (i.e. monthly, quarterly etc.) in fixed and predetermined money. This is the most convenient way of investing in mutual funds, since the investors need not invest large sum of money at a time
- It gives Benefit of Compounding
- It allows Rupee Cost of Averaging, which gives average NAV costing.
How to invest in SIP (Systematic Investment Plan) ?
For investing in Mutual Funds through SIP route the investor needs to have a bank account, a demat account and broker through whom units can be purchased. However, broker will not be required if you wish to carry out direct plan of SIP investment. Start investing in SIP Online via Fintoo.
SIP investment requires the investor to select following options:
- Fund House (the company which covers the particular Mutual Fund)
- Scheme Name (name of the Mutual Fund Scheme- be careful while selecting this option, since usually the same mutual fund scheme will have more than one variant wherein one could be a growth option whereas another could be a dividend option etc.)
- Dividend or growth option
- Frequency of payment (this is SIP periodicity i.e. the periodic intervals in which the investors should pay the SIP amounts)
- No. of months (time period for Mutual Fund Investment SIP)
- Start date (this is when the SIP will be auto debited)
- SIP amount (this could be in multiples of Rs.500 or Rs.1000)
How SIP (Systematic Investment Plan) will be executed?
Usually, the SIP execution requires One Time Bank Mandate, which means that the investor needs to specify that he is providing consent to his SIP installments to be debited from his bank account. This will relieve the SIP investor from making SIP payment on predefined time intervals. The One Time Bank Mandate specifies the upper cap limit for SIP auto debit. This will allow the SIP investor to create multiple SIP’s under a single Bank Mandate.
Who should go for SIP (Systematic Investment Plan)?
SIP is suitable for any and every investor due to its beneficial features like
- Flexibility to choose periodic SIP investment amount
- Flexibility to choose periodicity for SIP auto debit
- One Time Bank Mandate (makes up easy purchase)
- Easy and convenient (as investor can choose a minimum amount for SIP investment)
Which SIP (Systematic Investment Plan) suits you?
Selection of appropriate SIP depends on various other factors like
- Investment goals horizon (long term, short term or tax saving)
- Availability of surplus money (for SIP investment)
- Preference for income over wealth building or vice versa
- Tax saving with lowest lock in period as compared to other tax saving instruments (only Equity Mutual Funds)
- Asset Allocation (there are equity funds, debt funds, infrastructure funds etc. which has asset allocation predefined by the fund house)
- Capitalization of underlying assets (Large cap, Small cap, Mid cap, Multi cap etc.)
- Risk-Reward matrix (If you are risk averse investor, you should take up low risk-low reward portfolio)
- Technical parameters (For e.g. Sharpe ratio refers to return earned over and above the risk free return, or Alpha which is return of mutual fund over and above its benchmark index etc. These numbers are specified for each scheme and are available on any related website like Value research.com etc.). These parameters help the investor analyze the risk and return scenario. However be sure one should compare these numbers with peers i.e. funds with similar asset allocation and capitalization.
Save Income Tax with SIP (Systematic Investment Plan)?
Section 80C lists down the SIP Investment in mutual fund (only ELSS – Equity Linked Savings Scheme) for tax saving purpose. Thus, SIP helps you not only in saving tax but also in investing better. Lock in period is 3 years for the ELSS which is the lowest for any tax saving instrument. After the expiry of lock-in period of 3 years, redemption or sale of ELSS units is exempted from Capital Gains Tax. Additionally, if the investor has opted for dividend plan, then dividends received is also exempt since it arises out of ELSS.
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Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.