SIP investment in mutual fund “a trending approach of investments among Indian investors”

All about SIP
All about SIP
Table of Contents

A. What is SIP investment in mutual fund?

SIP, a short name of Systematic Investment Plan, is a mode of investment in Mutual Funds. Investors can invest a predetermined amount in specific Mutual Fund schemes at regular intervals instead of making a lump-sum investment. SIP investment in mutual fund is a way to become a disciplined investor by cultivating a habit of regular investment. It is an easy and investor friendly approach of investment to achieve the future financial goals. This article covers many aspects of SIP investment in mutual fund.
SIP investment is very popular among the mutual fund investor. Indian Mutual Funds have currently around 3.88 crore SIP accounts and the trend is increasing very fast. A big number of First-time investors are participating every day in SIP investments.

B. How can I start my SIP investment in mutual fund? 

The process of SIP investment is simple and investor friendly. All you need to do is to –

  1. Analyse and understand the future financial needs and investment objective
  2. Decide the route of investment whether online or offline
  3. Select the most appropriate SIP scheme matching to your investment objective
  4. Complete the KYC process
  5. Submit the Common application Form/ SIP form along with subscription amount to the respective intermediary/AMC/RTA if you choose the offline mode OR an appropriate online platform/ Portal of Asset Management Company/ RTA for online mode.

How SIP investment in mutual fund can be done offline
Complete the KYC if making investment first time and then fill in the Common Application Form / SIP form and submit it to the office of the AMC / Registrar and Transfer Agents (RTAs). You can make offline investment through a mutual fund distributor as well.
To complete the KYC, you need to submit an identity proof, address proof and a photograph. You should also confirm your physical existence through an In-Person Verification or (IPV).
To read more on KYC process click here (Give the link of IPV section of blog KYC)
You have to provide a bank mandate form also, mentioning all your SIP details for regular payments.
How SIP investment in mutual fund can be done online
SIP can be started online while sitting at home or office. Primarily you need to visit KYC registration agency online and get the KYC done if you are investing in mutual funds for the first time. Many Mutual Funds are also providing eKYC facility on their website. Follow the steps and procedure shown in the website for this purpose.
Enter the required details and upload the scanned copy of your identity proof, address proof and a photograph. Generally, Pan and Aadhar card of investor is supposed to be sufficient for KYC purpose. Complete the IPV (In-Person Verification) through your physical presence along with original documents.
Many fund houses are now providing video call facility for In-Person Verification. They will connect you through a video call and confirm your physical existence through a webcam. Keep your original PAN card and address proof handy because you have to show it to them during the video call.
To read more on KYC process click here (Give the link of blog KYC)
After completing the KYC verification create a transaction account with the fund house. Login intothe account and submit your subscription request to start a SIP of your choice.

 C. Why First-Time Investors prefer to start investing through SIP?

  It has been observed that generally a first time mutual fund investor prefers to start investing in Systematic Investment Plans offered by different mutual funds houses.

  1. Suitable to their earnings:

In our Indian society people start earning consistently at the age of 21 to 25. They can invest from their regular income as they do not have any big funds to invest at this time. They have only a fixed part of their salary or income in the form of savings, which they can invest periodically.
SIP offers them the facility of investing a fixed amount of their choice on periodical basis. So SIP investment suits them perfectly in every respect like periodical investment, small amount of investment, reasonable returns etc.

  1. Small investment can avail the multiple benefits of diversification & professional care:

People can invest depending on the kind of fund and investment amount they choose. An investor may not have enough money to create a diversified investment portfolio and unable to invest in a very large number of different stocks and bonds.  Simultaneously they may not have resources to take the services of professional investment experts.
In SIP investment, even the small periodical investment ofRs. 500 will become a part of diversified investment portfolio nurtured by the skilled fund managers.
This can be understood better by an example that you don’t need to own a plane to travel from one place to another. Every air traveler does not own a plane. We can afford air travel simply because all the costs incurred are divided among all the passengers using the services. In other words, small SIP instalments from a large group of investors become a substantial corpus which enables the fund manager to diversify the scheme portfolio.

  1. Less effected by the market movement:

Volatility is a feature of the market. SIP investment has a benefit of cost averaging. Cost averaging reduces the impact of ups and downs of the market on SIP investors. In case of SIP investment, there is no need for an investor to time the market. The investor keeps investing regularly at fixed intervals without waiting to see when the market goes down. This helps in averaging the cost of investments. 

  1. To achieve future financial goals

Regular investments convert into big corpus which can be utilized in achieving the future financial goals. We all have some plans and goals like buying a house, children’s education, or retirement. This requires big amount of money at different stages.
SIP investment acts as an effective tool to accumulate the required amount at a pre specified time to fulfill the life goals.
You can invest any amount or can conduct more than one SIP to meet your short term or long term future goals. You can invest amount as per your convenience and can withdraw or stop the SIPas per your requirements. To know more about SIP stopping process you can click here
(Give the link of blog Topic:  How can you stop the SIP investment made by your deceased loved one during Covid-19 Pandemic)

  1. It develops a habit of saving

Many of us prefer purchasing articles on loan and a big share of our income goes in paying EMIs. Cost of living and inflation both are rising. It is creating a sense of insecurity in many families. Most of the time youngsters are facing short of money situation because they have no savings and a large part of the income goes towards repaying the loan.
The best way to develop a habit of saving is by investing in SIPs. This will not only help you save regularly but the corpus that will be accumulated over time will be rewarding. Also, you can withdraw the amount from SIP anytime, whenever you want it, so there is no blockage of your saving as it happens in RDs or FDs.

D. How to figure out the amount of SIP investment in mutual fund 

Amount of SIP investment is subject to the objective of investment. Primarily investor has to define the goal and then calculate the amount needed to be invested.
Once the goal or goals and time period to it are defined then assume a reasonable annualized rate of return, inflation rate, and future cost of expenses and calculate the required amount to be invested separately.
Suppose goal of children education needs to be achieved in seven years and goal marriage of child in eleven years from now and so on.
Calculate it separately. Suppose that the goal of children education needs Rs 18 lakh after 5 years and goal ofmarriage of child needs Rs 24 lakh after 11 years. You are expecting a return on investment @ 12% annually and inflation @ 4% per annum. Put the values in Calculators available online on different websites. This calculation will provide you the value of SIP to made at the defined intervals to achieve your defined goals.
You can click here to get the calculation (give the link of amry world planner section).

 E. SIP (Systematic investment plan) Vs RD (Recurring deposit in banks) – a comparison 

SIP schemes are a product of mutual fund houses whereas RD is offered by banks/post offices. In both the financial products, investment is made on a predetermined periodical interval.
RD is very popular in conventional investors. Many of these people are not satisfied with the returns they get on their RD investment but there is no comparative analysis of similar investment options available with them. The myths associated with the share market products actsas a blocking factor to switch their RD investment into some other high earning investment products like SIP with Mutual Funds.
A comparison table is shown below to have a quick look on pros and cons of Recurring Deposits and SIP investments in Mutual Funds.

FactorsRecurring Deposit in bank/post office (RD)Systematic investment Plan (SIP)
Periodical investment facilityA pre determined amount can be deposited on monthly basis only.Investor can generally deposit a pre determined amount on weekly, monthly or quarterly basis as per his choice.
Available variety of schemesThe variety of investment schemes is not available.The verity of investment schemes is available. Investor can invest in schemes like equity, debt, hybrid as per their choice and risk bearing capacity.
Investment durationIt has a pre-determined maturity period. The investment duration ranges from minimum 6 months to maximum 10 years.Investor can invest in SIP for any duration subject to minimum lock in period specified by the scheme, if any.
Maturity amount (Earnings)Maturity amount on RD is fixed and kwon to the account holder at the time of starting of the investment. At present, the offered interest rate on RD is around 5 to 6 percent p.a.Maturity amount in SIP investment is not fixed because it is linked to the market. If we analyze the returns earned in last many years on long term SIP investments, in general it is 12% to 15% p.a. for equity and 8% to 10% for debt MF investments.
Liquidly of amountIf an investor withdraws the RD account before its maturity, they have to pay prematurewithdrawal charges.In most of the SIP schemes investor has to bear exit load if they redeem their investment with in 1 year or specified lock in period. There after the money can be withdrawn any time without any penal charges.
Safety on investmentIt is considered to bea safe investment andcarries very low risk of capital loss.Mutual fund investments are subjected to market risks.
Taxation of earningsInterest accrued on RD is taxed during the period when it is earned, whether received or not.Gain on SIP investment and the consequent tax on it can be deferred till the investment is redeemed.

Click here to read more on this topic (Give the link of blog topic SIP Vs RD – a comparison)

 F. SIP Vs lump sum investment in Mutual Funds 

Many mutual fund investors usually get confused in taking decision on whether to invest lump sum or go through SIP route.
Lump sum investment is a onetime investment approach in which you put all your money available to you at a particular timein one or more than one mutual fund schemes. Such investment pattern is suitable for a seasoned investor having a good sense of market timing and Patience to hold the investment during the market turbulence.
SIP is a methodical approach of investing in which you invest a predetermined amount on a specified date in a chosen mutual fund scheme. The investors who belong to service class or any one whose earning pattern is periodical prefer investing through SIP route.
There are many aspects which need to be considered like risk & returns involved in both the investment approaches, taxation aspect etc.
Comparison on earnings:
Let us compare the returns on investments through lump sum route and SIP route through an example:
Suppose you have 240000 rupees for investment. You invested in a lump sum manner for two years and realized return on investment @ 12 percent on investment. At the end of two years your corpus will be Rs 301056.
If you invest the same amount with an expected return of 12 percent through monthly SIP route then every month you will invest Rs 10000 for a period of 24 months. At the end of two years your corpus will be Rs 272432.This is simply because your investment is staggered to 24 months and you have not invested all the money at Zero date.
We have to keep in mind that in case of Lump sum investment, this return can be achieved by few seasoned investors only. A new and inexperienced investor may or may not realize such returns through lump sum investment. Market may result in a different direction also.
In SIP investment you are investing your money in installments. After paying your first investment of Rs 10000 Remaining amount of Rs 230000 is still in your hand and may earn returns for the remaining period. You can park the remaining amount in a safe debt fund and let it grow with reasonable returns. Alongside you are taking the benefit of cost averaging also. Risk of loss is also very low as compared to lump sum investment.
Taxation Aspect of lump sum and SIP investment:
In lump sum investment Capital gain taxes are calculated simply on the basis of holding duration of the on the total investment amount according to the tax rate given in the above table.
In SIP investment tax is calculated on holding period after subscribing to each SIP. For the purpose of taxation, each SIP is considered a separate investment. SIP is a periodical investment of chosen frequency. With every frequency of investment in a selected scheme you purchase a certain number of fund units. When you redeem the scheme units, the redemption is processed on a first-in-first-out basis. This means that the unit you purchased first will be the made available first for redemption processing and the same sequence will continue. It is called the FIFO method.
To read more on taxation click here (give the link of the blog Topic: SIP Vs lump sum investment)

 G. How power of compounding makes your SIP investment in mutual fund big? 

Compounding is the process to generate earnings on investments through getting interest on previous earnings. Compounding happens when interest is received repeatedly.
In this process, the interest is earned on previous interest on the principal amount invested.  This cycle leads to increasing interest, so the amount of money invested over time takes the form of a large corpus.
Difference between simple interest and Compound Interest
Simple interest can be defined as the interest earned only on the principal amount for a given period of time. It is calculated as per the below given formula –

Simple interest = P*R*N
P = Principal,
R = Rate in percent (5% means 5/100)
N = No of years

Compound interest is calculated on the revised principal after adding the previous interest. In this process the principal amount keeps on increasing because the interest earned will also become a part of principal amount for further interest calculation. The basic formula to calculate the compound interest is –
C.I. = Principal (1 + Rate)Time – Principal

Now, see the difference in interest earned through simple interest and compound interest on the amount of Rs 1 lakh –
Compound InterestSimple Interest (SI)Compound Interest (CI)
Principal Amount100000100000
Rate of Interest (yearly)12%12%
No. of Years55
Total Value6000076238

There is a significant difference in amount earned as interest. Compounding is the key factor of this difference and it is due to its multiplier effect.
Power of compounding acts similarly in the mutual fund investments also. A smart investor can take maximum advantage of compounding by initiating an early investment in suitable mutual fund SIP schemes for a longer duration.
To read more on Compounding click here (give the link of the blog Topic: Power of Compounding)

 H. How tax is calculated on SIP investment in mutual fund? 

There are two ways by which a SIP investor gets the returns on their investments on which the tax is calculated.

  1. Dividend income

Dividend income through mutual fund investments is taxable in the hand of investor. Investor is liable to pay taxes on their dividend income. This income is added in the gross income of the investor for taxation purpose. It is taxed on applicable income tax slab rates.

  1. Capital Gain:

Capital gain is the amount of profit earned from the sale of a capital asset. It may be mutual fund units, stocks, bonds, real estate etc.
Specifically for SIP in mutual funds, it can be defined as profit realized due to the appreciation in the price of the fund units in mutual funds. Capital gains are taxable in the hands of investors.
Capital gain is classified in two categories on the basis of holding period of units by an investor.  It is known as Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Applicable tax rates are different for Short Term Capital Gain and Long Term Capital Gain. Tax rates are also different for Equity oriented SIP schemes and Debt oriented SIP schemes.
Funds having its portfolio exposure 65% and above in equities, It is considered as Equity Fund and portfolio exposure 65% and above in Debt securities, It is considered as Debt Fund for taxation purposes.
SIP is a periodical investment of chosen frequency. With every frequency of investment in a selected scheme you purchase a certain number of fund units. When you redeem the scheme units, the redemption is processed on a first-in-first-out basis. This means that the unit you purchased first will be the made available first for redemption processing and the same sequence will continue. It is called the FIFO method.
Let us make some assumptions to understand it better. Assume you invested in an equity fund via monthly SIP mode and invested a sum of Rs 10000 per month for one year.  Due to any reason you decided to discontinue the investment and applied to redeem all your scheme units after 13 months. In this case, the first units purchased through the first SIP has completed the holding period of 12 months. Therefore, it will come under category of LTCG and the remaining units will come in the category of STCG. Tax calculation on the profit booked will be done as per the tax rates of the LTCG and STCG. If the amount of LTCG is less than Rs 1 lakh, no tax will be levied. Short-term capital gains on the units purchased via SIP from the second month onwards will be taxed as applicable rate (Presently at a flat rate of 15% irrespective of your tax slab).
To read more on Tax calculation on SIP investment click here (give the link of the blog Topic: SIP capital gain tax calculation)

 I. How can you Redeem/Withdraw or stop the SIP investment in mutual fund? 

How can you Redeem/Withdraw your SIP INVESTMENT?
Investment is made to provide financial security for the future. It should be readily available to the investor at the time of their financial needs. So it is equally important to understand the provisions of total/partial withdrawal of investments at the time of making investment in a financial instrument. 
Mutual fund units can be redeemed partially or totally through offline as well as on line mode. The unit holder has to submit a duly filled & signed Redemption Request form to the AMC office or authorized investor service centers or Official Points of Acceptance of Transaction designated by the Registrar.
Mutual funds can be redeemed online through a mutual fund’s website or fund house authorized partner portals. Investor has to log-in the Online Transaction page of the desired Mutual Fund portal / partner portal by using their Folio Number and/or the PAN, select the Scheme and the number of units or the amount they wish to redeem and confirm your transaction.
Investor can submit the redemption request to AMC office or Contact a distributor for this purpose. Karvy, CAMS etc. also offer the option of redeeming mutual fund units for many AMCs through online and off line mode.
To read more on redemption of SIP investment click here (give the link of the blogTopic: How can you withdraw your mutual fund investments) 
How can you stop your SIP investment in mutual fund?
There may be a situation that investor either does not want to continue the SIP or wants to continue the SIP investment but not willing to pay the periodical payments for some period. In such a situation investor can stop or pause the SIP for specified duration and continue it again without any penalty. It is necessary to inform your bank & fund house.
To read more on redemption of SIP investment click here (give the link of the blog Topic: How can you stop the SIP investment made by your deceased husband?)
 

Follow me on
Like this article? Share.
Facebook
Twitter
WhatsApp
Email
error: checked