SIPs (Systematic Investment Plans)

Systematic Investment Plan or SIP is a strategy of investment that allows one to invest a certain amount of money in selected investment instruments at regular intervals. For instance, you can invest small amounts of money on weekly, monthly or quarterly basis instead of investing a lump sum amount in a year. Hence, SIP investment plans are a smart and hassle-free way of investing in mutual funds (or other investment instruments) to create wealth for fulfilling your dreams.

All you need to know before choosing an SIP plan

#SimpleHai SIPs:

Small/New investors must go for SIPs  

SIP is meant to be a vehicle for disciplined, regular and long-term investment for all type of investors. It is meant to average rupee costs and provide an opportunity for all, whether they have limited savings or high savings, to participate in smart investment options.

Rupee cost averaging offered by SIPs helps you acquire more units when the market is low and lesser units when the markets are high, hence averaging the acquisition cost. The pool of money acquired and invested in underlying securities generate the same returns i.e. whether the investment is of Rs. 1,000 or Rs. 50,000 a month, the returns will be the same.

What are the most common misconceptions about SIP?

SIPs are a way of investment which are increasing in popularity day by day. However, there are a lot of misconceptions regarding SIPs as investment avenues. Some of them are as listed below:

1. One of the most common misconceptions is that only small investors take the SIP route of investment. This is not true. Any investor can easily use the SIP route of investment in Mutual Funds with desired amount of money, starting as low as Rs. 500 going up to any desired amount. Moreover, SIPs help any investor to build a habit of discipline in investments.

2. Rupee cost averaging works in Equity SIPs too, then what is the need for Mutual Fund SIPs? Most investors build their portfolio according to their risk taking appetite and style (flex-cap, multi-cap, etc.). Investing in one equity stock is not as diversified as regular investing in Mutual Funds, which have a diversified portfolio.

3. SIPs being different from lump sum Mutual Fund investments is another misconception. SIP is not comparable to lump sum mutual fund investment schemes at all as there are no special schemes for SIP Investment. It is a method of investing.

4. You cannot do lump sum investments in SIPs, is not true. If at all you have a sudden surplus of money in a particular month, then you can make additional purchase in that folio. For example, if you are running an SIP of 2,000 per month and get 10,000 extra in any month, then you can invest 12,000 in that month and continue normal investment in other months.

5. “Do not start an SIP as markets are very high” is another big misconception. SIPs allow you to gather more units when the price is low, hence reducing the average purchase price.

6. In a tax-saving Mutual Fund SIP like ELSS (Equity Linked Saving Scheme) an SIP’s each instalment can be withdrawn 3 years after the transaction date of the particular instalment. For example if you set up a 3 years sip, the first instalment can we withdrawn after 3 years and the last after 3+3 ( the last instalment will be at the end of three years and the 3 years lock in)

In a tax saver SIP, entire money can be withdrawn after 3 years

There is a common misconception that entire investment in tax saving mutual funds (commonly known as Equity linked Saving Schemes – ELSS) can be withdrawn, without any tax implications, once the lock-in period is over. But this is not the case!

The fact is your every SIP installment should have completed the requisite lock-in tenure. For example, if you invest Rs 5,000 through SIP in the month of January 2017, the lock-in period for only that installment (i.e. January 2017 installment) will get over in January 2020. Likewise, each SIP installment needs to complete 3 years lock-in period.