Systematic Investment Plan also referred to as SIP is a very well-organized way of investing your money in a mutual fund. When you setup an SIP with mutual fund, a certain amount of money gets debited from your account every month. This amount would then be invested in a mutual fund that you prefer. The investment you make here, is accumulated and continues to grow over a period of time.
Here are 5 facts about Systematic Investment Plans that you should know about:
1. SIP Is a Safe Option
Investing in SIP is one of the best investing options available in the market. SIP investment plan is also a very safe option to invest in mutual funds. When you invest a lump sum amount in mutual funds, depending on the market, you could actually end up paying a lot. So, to avoid such situations, you should invest in mutual funds when the market condition is good. However, this requires a good knowledge of markets.
But, when you choose an SIP investment plan, you do not have to worry about market conditions since you would be investing a small amount every month. Some months, you could get a high price, while other months it could be low. So, if you look at it on a long-term basis, the price you pay would be taken on an average of both – high and low. Thus, with an SIP plan, you will not pay a very high price for your mutual funds. This is termed as the rupee cost averaging.
2. SIP Can Be Stopped
Yes, unlike other investments like recurring deposits and fixed deposits, a Systematic Investment Plan can be stopped at any time. Once you stop paying for your SIP investment plan, you can decide whether you wish to redeem all your money from your mutual fund or to continue.
3. SIP Can Save Tax
If you are using an SIP plan to invest in an ELSS mutual fund, then you can save on tax too. You will be allowed to claim tax deductions of up to Rs. 1, 50,000 under the tax provision of Section 80C. For you to take benefit of your ELSS mutual funds using SIP, you should make sure that the total of all your SIP plans should be Rs. 1,50,000 in a financial year. If you invest more than Rs. 1, 50,000, it wouldn’t give you any extra tax benefits. However, you can still go ahead and invest in an ELSS mutual fund if you think it’s quite a good investment.
4. SIP is Great for Long Term
Yes, SIP investment plans are perfect for long term investment. Instead of waiting for the right time to accumulate enough money to invest, with Systematic Investment Plan, you can actually start investing right away with whatever savings you have. Plus, by going in for a long-term investment plan, you can avoid being affected by short- term market conditions too.
5. Take Advice
Most people are hesitant to take advice related to financial matters due to different reasons. But when it comes to SIP investment plans and mutual funds, it’s always important that you do all the research you can and take advice whenever you require it. There are many financial advisors that are always ready to guide and help investors in whatever way they can. They will help come up with an investment strategy that will prove beneficial for you. Hence, go out and seek necessary help when it comes to making important financial decisions like this.
Other Important Questions
Here are a few other commonly asked questions related to a Systematic Investment Plan that you may find useful:
1. Can SIP amounts be increased or reduced?
The procedure to change your SIP amount is quite complicated, so the best solution would be to simply go ahead and start a brand new SIP plan in the same fund, but with the amount of your choice.
2. Does SIP have a lock in period?
If you are planning to invest in an open-ended fund, you will not have a lock-in period for your Systematic Investment Plan. This would actually depend on the type of mutual fund you are investing in. Some mutual funds come with a lock-in period, while others do not. An ELSS mutual fund has a lock-in period of 3 years.
3. Does SIP have exit load?
The exit load of your SIP would depend on your mutual fund. If your mutual fund comes with an exit load for a certain period, then you will have an exit load on your SIP as well.
4. Is SIP better than RD?
SIP investment plans can give you higher returns than an RD. The returns you get on an SIP plan would depend on the mutual fund you invest in. Equity mutual funds come with high risk, while debt mutual funds come with low risk. With RD, the rate of return is fixed. A debt fund usually gives you much better returns when compared to an RD. They are also considered low risk as well.
5. Is SIP and mutual funds the same thing?
SIP is just a method that is used to invest in a mutual fund. You could choose to invest in a mutual fund in two ways – SIP or lump sum. When you decide to invest a lump sum amount, you have to put a large amount of money into your mutual fund at one go. On the other hand, with an SIP investment plan, you can invest smaller amounts on a monthly basis. This money could be debited from your account every month, which makes it simple and easy on your pocket.
6. Which SIP should I invest in?
This would totally depend on your needs and the risks you are willing to take when it comes to your investments.