13 Things You Need To Know About Systematic Investment Plan

31 August 2021
9 min read

There are many misconceptions about SIP. Below are a few questions that aim at addressing your doubts about SIP:

1. What is SIP?

SIP stands for Systematic Investment Plan. SIP is an organized way of investing regularly in a mutual fund. Many times we don’t have large amounts of money to invest. When you set up a SIP with any mutual fund, your account is debited a fixed amount every month. This amount is invested in a mutual fund of your choice. Over a period of time, your investments accumulate and keep growing.

2. Is SIP safe or not?

SIP is a very safe method to invest in mutual funds. If you invest in a mutual fund lump sum, depending on the market condition, you could end up paying a very high price for a mutual fund. To avoid this, you should invest in mutual funds when the markets are not overvalued. This obviously requires a good knowledge of the markets. This is called timing the market.

You do not need to worry about timing the market when investing via SIP. In SIP, you invest a small amount of money every month. In some months, the price will be high while in some months, the price will be low. If you consider the long term, the price you pay will be an average of high and low. Thus, you will not pay a high or overvalued price for the mutual if you invest via SIP. This is called rupee cost averaging.

3. Are SIP returns taxable?

Depends on the type of mutual fund you invest in and when you redeem your investment.

Returns from equity mutual funds have no tax on them if redeemed after a year of investment. If you redeem before a year, you will have to pay a tax of 15% on your gains.

Debt mutual funds, on the other hand, are taxed at a rate of 20% with indexation benefit if you redeem after 3 years since investment. If you redeem before 3 years, the tax is based on your income tax slab.

Note: Tax in case of SIP is calculated on individual SIP investments. This means the tax will be calculated for each SIP instalment separately.

Example: Let’s say you have an SIP of ₹1000 per month starting in January 2018 and lasting till December 2018. Let’s assume you have invested in an equity mutual fund. So you won’t have to pay any tax if you redeem after 12 months from the investment. So, in order to not pay any tax, you should redeem your investment made in January 2018 after one year, that is, after January 2019. Likewise, the instalment you paid in February 2018 should be redeemed after February 2019 to avoid paying taxes.

4. Can SIP be stopped?

Yes. Unlike fixed deposits (FD) and recurring deposits (RD), you can stop an SIP any time you want. After stopping paying for an SIP plan, you can either choose to redeem your money from the mutual fund or continue to remain invested in the fund.

5. Can SIP save tax?

If you use SIP to invest in tax saving ELSS mutual funds, you can save tax too. You can claim tax deductions of up to ₹1.5 lakh under Section 80C by investing in ELSS mutual funds.

To take benefit of ELSS mutual funds via SIP, make sure the total of all your SIPs in a financial year is ₹1.5 lakhs. Investing more than ₹1.5 lakh won’t give you any additional tax benefit. You can however still invest in an ELSS mutual fund if you feel it is a good investment.

Example 1: In the financial year 2018-2019, if you start a SIP of ₹12500 starting in April 2018 till March 2019, you will have made an investment totaling ₹1.5 lakh in the financial year 2018-2019. Thus, you will be eligible for a tax benefit of ₹1.5 lakh for the financial year 2018-2019.

Example 2: In the same example as above, let’s make a small change. Instead of starting in April 2018, let’s say you started in May 2018 – one month late. The last installment of your SIP would be made in April 2019 which is not a part of the financial year 2018-2019. Then, in the financial year 2018-2019, your total investment would only be ₹137500. So you would be eligible for a tax benefit of only ₹137500.

6. Can SIP amount be reduced/increased?

The procedure to do so is very complicated. But there is a solution to this problem. You can simply start a new SIP in the same fund with the increased amount.

Example: Let’s say your SIP is ₹10000 a month and you want to increase it to ₹12000 a month. You can simply start a new SIP with an increased amount in the same mutual fund.

Note: Though not very common, some mutual funds stop accepting new SIPs due to various reasons. If your mutual fund is not accepting new SIPs and you cancel your SIP, you will not be able to start a new SIP in the same mutual fund. In such cases, it is advised that you not cancel the existing SIP but start a fresh SIP in a different mutual fund with the extra money that you have.

7. Can SIP be started online?

Yes, you can easily start a SIP online. To start a SIP online using Groww, make sure you have signed up on groww.in. Upload necessary documents (PAN, address proof, and bank statement) and then choose a mutual fund you want to start a SIP in. Go to the mutual fund page on groww.in and follow instructions.

8. Does SIP have a lock in period?

If you are investing in an open-ended mutual fund, there will be no lock-in period for your SIP as well. It completely depends on the mutual fund you invest in. Some mutual funds, do have a lock-in period. ELSS mutual funds have a lock-in period of 3 years. Many other mutual funds have lock-in periods too. Mutual funds that have lock-in periods are called close-ended mutual funds.

9. Does SIP have an exit load?

The exit load of a SIP depends entirely on the mutual fund. If the mutual fund specifies an exit load for a period, then there will be an exit load on the SIP also. Most equity funds have an exit load of 1% if redeemed before a year from investment and no exit load if redeemed after a year. The exit load is calculated upon the value being redeemed.

Example: If there is an exit load of 1% if redeemed before a year from an investment, and you are redeeming ₹100000 before a year, then, the exit load will be 1% of the total redeemed amount. The amount, in this case, will be ₹1000.

In the case of SIPs, each SIP installment is treated as a separate investment.

Example: Let’s say you started a SIP in January 2017 lasting till December 2017. This mutual fund, we assume, has an exit load of 1% applicable till a year from investment and no exit load after that. If you choose to redeem the entire amount in April 2018, then you will be charged no exit load on the investments made between January 2017 through April 2018. However, since it wouldn’t have been a year since you invested the installments in and after May 2017, an exit load will be applicable to them.

To know more about exit load, click here.

10. Is SIP better than RD?

SIP has the capability to give much higher returns than RD. The return you get on your SIP depends on the mutual fund you invest in. There are debt mutual funds that are considered low risk and then there are equity mutual funds that are considered high risk. Unlike RD, the rate of return isn’t fixed in case of mutual funds.

Debt funds usually give much better returns when compared to RD and are considered the low risk too. If you can take more risk, you should try setting up and SIP in higher risk equity mutual funds.

Here is a portfolio of low-risk mutual funds.

11. Is SIP good for the long term?

Yes. In fact, it is better to invest in SIP for the long term. Instead of waiting and accumulating money to invest, you start investing whatever amount you are able to save. This way, your money is always invested.

Not just that, by investing for the long-term, you are ensuring that short-term market volatility does not affect your investment.

Learn which is better for you: lump sum investment or SIP investment.

12. Is SIP and mutual fund the same thing?

SIP is a method used to invest in mutual funds. You can invest in mutual funds in two ways: lump sum and SIP. When you invest a lump sum, you put in a large amount of money in a mutual fund in one go. In SIP, you invest smaller amounts of money on a regular basis – usually every month.

13. Which SIP to invest?

Which SIP you invest in depends on your needs. If you are willing to take risks, you can check out small and mid cap mutual funds. On the other hand, if you want moderate risk, you can check out large cap mutual funds. You can also check out debt mutual funds if you want to be exposed to very low risk.

Check out the 10 most recommended funds for SIP in 2019 here.

Choosing to invest via SIP is a good start to investing in mutual funds not only for new investors but also for experienced investors. Make sure to research carefully before investing. You can use this helpful SIP calculator to plan your SIPs.

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Happy investing!


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