How Should You Choose a SIP?
What is a Systematic Investment Plan?
A Systematic Investment Plan (SIP) is a Mutual Fund plan that lets you invest a fixed sum at regular intervals in the fund of your choice. The mutual fund units are purchased at the prevailing Net Asset Value and are credited to your account. These units accumulate over a period to build a healthy corpus.
Benefits of an SIP:
1) Disciplined and Regular Investing:
Making small investments reduces the burden on your pockets and helps you build a corpus without sacrificing your current needs.
2) Gain from Market Volatility with Rupee Cost Averaging
Investing a lumpsum amount at one time can be risky, especially in volatile markets. Investing regularly can average your cost of investment and help you navigate market price fluctuations.
Example: Suppose, you invest ₹10,000 every month in 2021 during a volatile market. You can easily conclude from the table below that your average acquisition cost of units in the year (₹ 30.77) is lower than the NAV (₹ 50) prevailing at the end of the year:
SIP INVESTMENT STATEMENT 2021 | |||
Months | Instalments (A) | NAV (B) | Units Purchased (C=A/B) |
Jan-21 | ₹ 10,000.00 | ₹ 20.00 | 500.00 |
Feb-21 | ₹ 10,000.00 | ₹ 24.00 | 416.67 |
Mar-21 | ₹ 10,000.00 | ₹ 40.00 | 250.00 |
Apr-21 | ₹ 10,000.00 | ₹ 50.00 | 200.00 |
May-21 | ₹ 10,000.00 | ₹ 30.00 | 333.33 |
Jun-21 | ₹ 10,000.00 | ₹ 36.00 | 277.78 |
Jul-21 | ₹ 10,000.00 | ₹ 45.00 | 222.22 |
Aug-21 | ₹ 10,000.00 | ₹ 40.00 | 250.00 |
Sep-21 | ₹ 10,000.00 | ₹ 20.00 | 500.00 |
Oct-21 | ₹ 10,000.00 | ₹ 24.00 | 416.67 |
Nov-21 | ₹ 10,000.00 | ₹ 30.00 | 333.33 |
Dec-21 | ₹ 10,000.00 | ₹ 50.00 | 200.00 |
Total Investment (Total A) | Average Cost (A/C) | Total Units (Total C) |
₹ 120,000.00 | ₹ 30.77 | 3,900.00 |
(The above data is for illustration purposes only.)
How To Choose An SIP
Here are the things you can keep in mind when choosing a SIP which suits your investment goals:
1) Historical Performance
Mutual funds are managed by professional fund managers who make investment decisions on your behalf. You can judge their performance based on their past returns. However, as past performance may or may not be sustained in the future, this indicator should not be your sole basis for comparison with other investments.
If your risk appetite is low you can invest in Debt or Gilt mutual funds which are relatively less risky.
Alternatively, for your long-term goals, you can invest in equity funds which generally outperform other types of funds over the longer term. At the same time, they carry a relatively higher risk due to the volatility in the equity market.
2) Your Risk Appetite
a) If you are risk-averse, you will prefer an investment which yields predictable returns, that is, a less volatile investment, such as:
i) Gilt Funds: These funds invest only in government-owned debt instruments.
ii) Debt Funds: These funds invest in government securities, corporate bonds, and other money market instruments.
iii) Debt - Oriented Hybrid Funds: These funds invest mainly in debt instruments with some exposure to equity.
b) If you have a high-risk tolerance, you could invest in equity funds which usually provide higher return but also carry higher risk.
3) Use SIP Calculator to Check the Probable Returns3) Use SIP Calculator to Check the Probable Returns
Use a SIP calculator to select the SIP amount that best suits you after considering your daily or monthly expenses and emergency fund requirements.
Is SIP Tax-Free?
Not all SIP investments attract tax rebates, however SIPs in an ELSS Scheme are exempt from tax under section 80C.
Taxation on Capital Gains from SIPs
Short Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
Equity Funds: 15% (plus applicable surcharge and cess) where STT is paid* | Equity Funds: 10% (plus applicable surcharge and cess) where STT is paid* |
Debt Funds: Other than Equity schemes, taxed at slab rates as per individual assessee** | Debt Funds: 20% plus applicable surcharge and cess) with indexation**
|
Further details on taxation
*Units of an equity oriented mutual fund shall be considered as a short-term capital asset where the same are held for a period of 12 months or less immediately preceding their date of transfer. Long-term capital asset means an asset which is not a short-term capital asset. 2 Under the provisions of new section 112A of the Act, in respect of transfer of a unit of an equity oriented fund on or after 1 April 2018, tax at the rate of 10 per cent (plus applicable surcharge and cess) shall be levied on long-term capital gains, exceeding Rs 100,000, where STT has been paid on transfer of such unit of an equity oriented fund. Such long-term capital gains are required to be computed without giving effect to the first and second provisos to section 48 of the Act, i.e. benefit of computation of capital gains in foreign currency and indexation in respect of cost of acquisition and improvement. Further, for the purpose of computing capital gains in relation to a long-term capital asset, being a unit of an equity-oriented fund, acquired before 1 February 2018, the cost of acquisition is deemed to be the higher of: The cost of acquisition of such unit; and The lower of – (a) the fair market value of the unit; and (b) the full value of consideration received or accruing as a result of the transfer of the unit. Fair market value has been defined to mean – a) in a case where the unit is listed on any recognized stock exchange, the highest price of the unit quoted on such exchange on 31 January Page 107 of 121 2018. However, where there is no trading in such unit on such exchange on 31 January 2018, the highest price of such unit on such exchange on a date immediately preceding the 31 January 2018 when such unit was traded on such exchange shall be the fair market value. Surcharge & Cess is as applicable.
**Units of a mutual fund (other than an equity oriented fund) shall be considered as a short-term capital asset where the same are held for a period of 36 months or less immediately preceding their date of transfer. Long-term capital asset means an asset which is not a short-term capital asset.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more