The introduction of Systematic Investment Plan (SIP) in the mutual fund is regarded as one the major breakthrough in the financial sector. It has helped to attract a new class of investors in the sector who were not comfortable to invest a lump sum at a time.
SIP in mutual fund first was launched on December 4, 2010, through BSE Star MF platform.
So, What is SIP and why it so much popular among mutual fund investors?
Systematic Investment Plan is an investment mechanism offered in open-ended mutual fund schemes. Here, small regular investments are made in a particular MF scheme over a long period of time.
It helps in beating the volatility in the market and accumulate large amount at maturity with the small investments made over the period. The investment mechanism is similar to Recurring Deposit scheme in which one saves with the bank and in SIP, one invests in the market and return percentage is far better than RD.
SIP works on a simple formula, Start Early with Regular Investments to create wealth.
It is always difficult to time the market correctly to make huge fortunes due to n numbers of factors constantly affecting the market. But with SIP, it reduces the factor of volatility in the investment as it is spread over a long period of time.
The market constantly moves in an up and down direction. Since an SIP invests regularly in the market whatever the market condition is, some investments are locked when prices are low and some at higher prices. Therefore, it helps to average out the volatility and achieve a lower average cost per unit.
SIP calculator is provided on different platforms. These are very comprehensive and easy to use. An investor needs to mainly provide three sets of information i.e
The chosen SIP calculator will compute the data given and will show the expected return of the investment in a Graph or Table format with expected maturity value.
To start SIP on a particular scheme, an investor has to submit following documents with specific details and mandate.
From 1st April 2018 tax on equity mutual funds shall be applicable on LTCG above Rs.1 lakh p.a. @10% without indexation benefit. For equity funds, the period of holding more than 12 months is regarded as long term.
While Debt mutual funds with more than 3 years on investment horizon are taxed at 20 percent with indexation benefit.
Those SIPs which continues until the time one redeems the investment and new units gets added to the investor's portfolio.
For equity mutual fund all those units added in the past one year of the SIP tenure and gains on those added units are taxed under Short term capital gains @ 15 percent. For debt funds, the capital gains arising from the units added in the past 3 years of SIP tenure are taxed @ 10 percent.
Investment in mutual funds through SIP is a game changing development for the industry and investors. Moreover, it has helped many small investors to become a part of the system who could not afford to invest a lump sum in mutual funds earlier. In SIP, patience and a right fund will work wonders for the investor in long term.
Now, that you know what is SIP in mutual funds. You are also clear on how SIP works and how to start SIP online. What do you think? Is investing through SIP in mutual funds good?