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Systematic Investment Plan

SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular saving schemes like a recurring deposit.

An SIP allows you to buy units on a given date each month, so that you can implement an investment / saving plan for yourself. Once you have decided on the amount you want to invest every month and the mutual fund scheme in which you want to invest, you can either give post-dated cheques or ECS instruction, and the investment will be made regularly. SIPs generally start at minimum amounts of Rs 1,000 per month and the upper limit for using an ECS is Rs 25000 per instruction. Therefore, if you wish to invest Rs 100,000 per month, you may need to do it on 4 different dates.

How to invest in SIPs?

The SIP option is available with all types of funds like equity, income or gilt.

An investor can avail the SIP option by giving post-dated cheques of Rs 500 or Rs 1,000 according to the fundsí policy.

If an investor wants to put more than Rs 500 or Rs 1,000 in any given month he will have to fill in a new a form for SIP intimating the fund that he is changing his SIP structure. Also he will be allowed to change the SIP structure only in the multiples of the SIP amount.

If an investor is investing in two different schemes of the same fund he can fill in a common SIP form for all the schemes. However if the first holders in those schemes are different than they will have to fill different SIP forms, as the first holder has to sign on the form.

The investor can get out of the fund i.e. redeem his units any time irrespective of whether he has completed his minimum investment in that scheme. In such a case his post-dated cheques will be returned back to him.

Here are some FAQs on the SIP

Is there a load?

An exit load is a fee you pay the fund when you sell the units, just like the entry load is a fee you pay when you buy the units.

Initially, funds never charged an entry load on SIPs. Now, however, a number of them do.

You will also have the check if there is an exit load. Generally, though, there is none. Also, if there is an entry load, an exit load will not be charged.

An exit load may be charged if you stop the SIP mid-way. Let's say you have a one-year SIP but discontinue after five months, then an exit load will be levied. These conditions will wary between mutual funds.

What is the minimum investment?

If you do a one time investment, the minimum amount that you have to invest is Rs 5,000.

If you invest via an SIP, the amount drops. Each fund has their own minimum amount. Some may keep it at least Rs 500 per month, others may keep it as Rs 1,000.

How often does one have to invest?

It would depend on the fund.

Some insist the SIP must be done every month. Others give you the option of investing once in three months or once in six months.

They also give fixed dates. So you will get the option of various dates and you will have to choose one. Let's say you are presented with these dates: 1, 10, 20 or 30. You can pick any one date.

If you pick the 10th of the month, then on that day, the amount you have decided to invest in the fund has to be credited to your mutual fund.

How must the payment be made?

You can opt for the Electronic Clearance Service from your bank; this means the mutual fund will, as per your instructions, debit a certain amount from your account every month.

Let's say you have a SIP of Rs 1,000 every month and you have chosen to invest in it on the 10th of every month. Under this option, you can instruct your mutual fund to directly debit your bank account of Rs 1,000 on the due date.

If you don't have the required money in your account, then for that month, no units will be allocated to you. But, if this continues periodically, the mutual fund will discontinue the SIP. You need to check with each mutual fund what their parameters are.

Alternately, you can give cheques to your mutual fund. In this case, they may ask for five Post Dated Cheques upfront with your first investment.

Since these cheques are dated ahead of time, they cannot be processed till the date indicated.

Must I state for how long I want the SIP?

Yes. You will have to state whether you want it for a year or two years, etc. If, during the course of this period, you realise you cannot continue with the SIP, all you have to do is inform the fund 15 days prior to the payout.

The SIP will be discontinued. You can continue to keep your money with the fund and withdraw it when you want.

Do all funds offer SIP?

No. Liquid funds, cash funds and floating rate debt funds do not offer an SIP. These are funds that invest in very short-term fixed-return investments. Floating rate debt funds invest in fixed return investments where the interest rate moves in tandem with interest rates in the economy (just like a floating rate home loan).

All types of equity funds (funds that invest in the shares of companies), debt funds (funds that invest in fixed-return investments) and balanced funds (funds that invest in both) offer a SIP.

Tax implications

Let's say you have invested in the SIP option of a diversified equity fund.

If you sell the units after a year of buying, you pay no capital gains tax. If you sell if before a year, you pay capital gains tax of 10%.

Let's say you invest through a SIP for 12 months: January to December 2005. Now, in February 2006, you want to sell some units.

Will you be charged capital gains tax?

The system of first-in, first-out applies here. So, the amount you invest in January 2005 and the units you bought with that money, will be regarded as the units you sell in February 2006.

For tax purposes, the units that you sell first will be considered as the first units bought.

How will an SIP help?

When you buy the units of a fund, you may do so when the NAV is really high. For instance, let's say you bought the units of a fund when the bull run was at its peak, leading to a high NAV.

If the market dips after that, the value of your investments falls and you may have to wait for a long while to make a return on your investment. But, if you invest via a SIP, you do not commit the error of buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time.

You will end up buying some units at a high cost and some units a lower price. Over time, your chances of making a profit are much higher when compared to an one-time investment.

Mutual Fund Investment Advice for Beginners


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