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How Should You Choose a SIP?

The key to a prosperous life is financial planning for retirement and other short- and long- term goals. Once you have taken care of your regular expenses, set aside some funds for contingency and insurance, you may start investing for achieving your future financial goals. You must have noticed people planning investments through SIPs: So, what is a systematic investment plan (SIP) and why do you need it? 
Sep 2022
5 mins read
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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
MonthsInstalments (A)NAV (B)Units Purchased (C=A/B)
Jan-21 ₹ 10,000.00 ₹ 20.00500.00
Feb-21 ₹ 10,000.00 ₹ 24.00416.67
Mar-21 ₹ 10,000.00 ₹ 40.00250.00
Apr-21 ₹ 10,000.00 ₹ 50.00200.00
May-21 ₹ 10,000.00 ₹ 30.00333.33
Jun-21 ₹ 10,000.00 ₹ 36.00277.78
Jul-21 ₹ 10,000.00 ₹ 45.00222.22
Aug-21 ₹ 10,000.00 ₹ 40.00250.00
Sep-21 ₹ 10,000.00 ₹ 20.00500.00
Oct-21 ₹ 10,000.00 ₹ 24.00416.67
Nov-21 ₹ 10,000.00 ₹ 30.00333.33
Dec-21 ₹ 10,000.00 ₹ 50.00200.00

Total Investment (Total A) Average Cost (A/C) Total Units (Total C)
      ₹ 120,000.00 ₹ 30.773,900.00

(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**

For further details on taxation refer to the note at end of this article. Investors are advised to consult his or her own professional investment / tax advisor / consultant for individual tax implication before investing.

Systematic investment plans have gained much popularity amongst salaried individuals who can invest part of their regular income. SIPs in mutual funds provide market-linked returns and the potential to steadily grow your corpus over the years. You can start your SIP journey and secure your future with the guidance of your financial advisor and tools available online!

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.

Source: 1 https://www.livemint.com/mutual-fund/mf-news/these-24-equity-mutual-fund-schemes-gave-over-18-annualised-3-year-sip-returns-11609047731716.html

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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
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The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be actually realized. These materials do not take into account individual investor's objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.
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