What is a Systematic investment plan?
Systematic investment plan (SIP) is a popular investment strategy available to salaried or regular income group investors among others. Instead of making one lump sum investment, investors put in a fixed sum of money each month, over a period of time. The amount to invest each month and the time span of this investment is decided by the investors. There are many options available in the market. This system does away with the need to time the market. SIP investment is an attractive scheme for wide range of income groups. You can invest as little as Rs. 500 a month and there is no upper limit. A Systematic Investment Plan is not a type of mutual fund. It is a method of investing in a mutual fund.
Where is the money invested?
In SIP the money is invested in a mutual fund which invests your money in the stock market and financial instruments such as bonds. SIP is only a methodology of investing. Investors must remember that merely investing through SIPs will not deliver the results. You need to choose the right scheme first. Money invested through a SIP will lose value if invested in the wrong scheme. So selection of the right scheme is the first job.
What are the benefits of SIP?
* By opting to invest every month, you invest in a disciplined manner. This results in forced savings. As this is a monthly exercise, you tend to plan your expenditure.
* Historically the returns offered by stock market investments are higher than any other form of saving.
* Buy low sell high, just four words sum up a winning strategy for the stock markets. But timing the market is not easy for everyone. 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 a one-time investment.
* Mutual Fund investments are managed by qualified and experienced professionals who have the expertise of investment techniques, backed by dedicated investment research team
Is there a load?
An entry or exit load is a fee you pay the fund when you buy or sell the units.
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 vary between mutual funds.
You can purchase scheme units at a lesser cost as most of the Asset Management Companies (AMCs) charge less “entry load” (for some scheme even NIL) for SIP investments, as compared to normal purchases in the mutual fund scheme.
Must I state for how long I want the SIP?
In 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.
What are the 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 it before a year, you pay capital gai |
