When it comes to investments, many individuals prefer a combination of convenience with higher returns. This is where a Systematic Investment Plan or SIP, comes in. Popular among salaried employees, this method of investment simplifies the process by eliminating the need to research on stock market. Here is everything you need to know about SIP.
What is SIP?
If you’re looking for a straightforward investment plan or feel overwhelmed by the complexity of mutual funds, an SIP is an ideal choice. With this investment plan, one can invest in a mutual fund on a regular basis. It eliminates the task of timing the market and offers the convenience of automated investments.
With regular investments, SIPs can yield significantly better returns compared to other options. SIP is also ideal for those who don’t prefer investing a lump-sum amount in a mutual fund. Let’s explore how SIPs works and their benefits.
How Does SIP Work?
A Systematic Investment Plan, or SIP, works by debiting a fixed amount from your account each month or quarter and investing it in a selected mutual fund. This approach results in better Rupee cost averaging by adjusting for fluctuations in the scheme’s unit price.
With the benefit of compounding, the corpus amount is far higher than other traditional investments. SIPs are generally preferred by individuals for goal-based savings. This method of investment is ideal for those who want to get started on their path to financial independence.
Benefits of SIP
As a popular go-to choice for wealth creation, a systematic investment plan offers plenty of advantages, that makes it the most preferred choice for individuals. Here are some of the key benefits of SIP.
Systematic Approach to Investments
Those who are looking for a more structured and disciplined approach to investing in mutual funds would find SIP as an ideal solution. One can fix a certain amount that would be debited from the account either monthly or quarterly. This also encourages a habit of saving and investing for those who have a financial goal.
Affordable Investment Method
Beginners or those who are looking for a lower investment amount can consider SIP to start their financial journey. With SIPs starting from as low as Rs. 500 per month, one can easily start investing towards a higher corpus amount.
By having a low-cost barrier, this investment plan also becomes accessible to those who are considering a less risky option for investment.
Convenience
Investing in an SIP is all about convenience, not only are they easy to set up, but also to check and track their performance. There are plenty of banks and brokers who have simplified selecting SIPs by displaying essential information in a user-friendly way.
A Safer Option for Investing
When compared to other forms of investments, an SIP combines the safety along with the benefits of market trends. By investing regularly, one can avert the risk of the volatile market conditions.
Types of SIPs
To cater to diverse investor needs, various types of SIPs are available to choose from. The different types of Systematic Investment Plans are:
Regular SIP
Ideal for salaried employees, a regular systematic investment plan encourages individuals to invest in mutual funds on a consistent basis, helping them build a big corpus amount.
Flexible SIP
A flexible SIP lets you adjust your contribution as per your needs and market conditions. It also lets you modify the frequency of the investment with the mutual fund providers.
Top-Up SIP
This type of SIP lets you generate more wealth every year by increasing your contribution amount monthly or yearly. As you incrementally invest more, you can enjoy more returns in your account.
How to Invest in SIP?
Ready to start investing in SIP? Follow these simple steps:
- Choose a Fund Provider: Select the mutual fund provider you want to invest with.
- Open an Account: Visit the fund company’s website or Registrar and Transfer Agent (RTA) website and open an investment account.
- Complete KYC Verification:
Provide your PAN card.
Submit proof of address (Aadhar, passport, etc.).
Upload a recent passport-size photograph. - Link Your Bank Account: Connect your bank account to your investment or DEMAT account for automatic SIP deductions.
- Start Investing: Once your KYC is verified, you can start your SIP by selecting the mutual fund scheme and setting up the investment amount and frequency.
Should I Invest in SIP for a long or short term?
One of the common concerns among new investors is when they should start SIP and how long they should be invested. Some of the best practices to ensure that you get the maximum returns in SIP are:
Start Early: It’s important to start your SIP as early as possible to take advantage of compounding. Even if you start at a smaller amount, you can increase it later with a step-up SIP.
Patience: SIP is all about consistent investing, which is why it’s crucial for investors to be patient through market changes. Avoid looking for short-term gains or cashing out during a downward trend.
Check for fees and taxes: When investing through a service or a mutual fund, be sure to check for the transaction costs. While withdrawing an amount from a mutual fund, an exit load is also charged to investors. The amount can vary between different mutual funds.
Goal-Based SIPs: Whether you are building an emergency fund or planning for a big purchase soon, you can calculate the annual returns of SIP to decide how long you must stay invested in it. However, it is important to note that SIP returns are subject to market trends.
Are SIPs taxable?
The taxation of Systematic Investment Plans (SIPs) depends on the type of mutual fund scheme and the holding period of your investment. To better understand the taxes and benefits of SIP, consider these points:
- Short-Term Capital Gains Tax (STCG)
Applicable if the units are sold within one year of investment. Equity mutual funds gains are taxed at 15%.
For debt mutual funds, gains from units sold within three years are taxed at the individual’s income tax slab rate - Long-Term Capital Gains Tax (LTCG)
Applicable if the units are sold after 1 year of investment, the gains are considered long-term. LTCG on equity funds is taxed at 10% without the benefit of indexation, but only if the gain is above INR 1 lakh in a fiscal year.
In the case of debt mutual funds, units sold after three years of investment are considered for LTCG. The LTCG tax on debt funds is 20% with the benefit of indexation.
- Tax on Dividends
As per the Finance Act 2020, earnings from dividends will also be taxed as per the income tax rate slab.
- Indexation Benefits
Investors can avail themselves of indexation benefits, which help in reducing taxable gains by considering the cost of acquisition for inflation. This benefit is only available with debt funds, and the units sold after 3 years of the first investment.
- ELSS SIP
Investors looking to avail themselves of tax benefits can consider investing in Equity-Linked Savings Schemes (ELSS) SIPs. These schemes are eligible for tax exemptions under section 80C of the Indian Income Tax Act, 1961.
Conclusion
Investing in a Systematic Investment Plan (SIP) is a hassle-free way to grow your savings. SIPs promote financial discipline by enabling fixed, periodic contributions to your chosen fund. Investors can also mitigate risk with Rupee cost averaging over an extended period.
Investors can consider using platforms like DBS Bank’s digibank to get started on their investment journey. With its easy-to-use app, users can make informed decisions when selecting the right mutual fund for them. Open an account with DBS’s digibank app today!
Related: How to Earn Money Online Without Investment? 13 Passive Income Streams
Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.
Active Noon Media is the largest local to national digital media website that represents the voice of the entire nation.