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SIP or systematic investment plan is one of the two ways of investing in mutual funds. The other way of investing in mutual funds is investing a lump sum. Investing in mutual funds via an SIP allows you to stagger your investments over and invest a small sum regularly.
Before we proceed to understand SIPs, let’s first understand mutual funds. A mutual fund is formed when a pooling entity (fund house or asset management company) pools investments from several individuals and institutional investors with common investment objectives to purchase securities. Mutual funds are broadly classified into equity funds, debt funds, and balanced/hybrid funds depending on the amount of their equity exposure.
Investing in mutual funds via an SIP is advisable for the first-time mutual fund investors as it helps them in instilling a sense of financial discipline in the long run. The frequency of your SIP can be weekly, monthly, or quarterly, as per your comfort. Most millennials prefer taking the SIP route as it gives them a high degree of flexibility. Investing through SIPs compels you to set aside a fixed sum regularly, which is what is needed to make investing a habit.
The table below shows the best equity funds:
The table below shows the best debt funds:
The table below shows the best hybrid funds:
Investing via SIPs in mutual funds is advisable for all individuals. Mainly, SIPs are advisable if you are a first-time investor. By investing in mutual funds via an SIP, you will get the glimpse of what mutual funds are capable of. Also, if you are new to the world of equity-linked investments, then it would be best to get started by investing in mutual funds via an SIP.
Investing in via an SIP alleviated the need to arrange a lump sum. Therefore, you can get started with your investment journey with a small amount. There are mutual fund plans that allow you to invest a sum as low as Rs 100 a month through an SIP. This option is not available with most other investment options.
Investing via lump sum requires you to arrange a large sum of money, say Rs 50,000. Investing a lump sum in a mutual fund scheme is similar to investing in a bank fixed deposit. On the other hand, investing via an SIP does not need you to have a substantial amount to get started. As mentioned earlier, you can start your investment journey with a sum as low as Rs 100 a month.
If you are to get the most out of your lump-sum investment, then you should necessarily time the markets. Lump-sum investments are advisable only when the markets have hit rock bottom, and they are sure to go up in the coming days. Investing in mutual funds via an SIP does not require you to time the markets as you will get the benefit of rupee cost averaging over time.
Investing in mutual funds via an SIP comes with a host of benefits. The following are some of the significant advantages of investing in mutual funds through an SIP:
Rupee cost averaging
Investing in mutual funds provides you with the benefit of rupee cost averaging. Meaning, you buy lesser units when the markets are booming while you buy more units when the markets are on the bearish trend. Over time, the cost of purchase of your fund units averages out and turns out to be on the lower side. Therefore, you don’t have to time the markets.
You can invest a small sum
As mentioned earlier, investing via an SIP has alleviated the need to have a lump sum at your disposal to get started with your investment journey. The standard minimum investment amount is Rs 500. Some funds allow you to invest even Rs 100 a month. Therefore, an investible amount is not a barrier to get started with your mutual fund investments.
SIPs provide you with much-needed flexibility. You can start or stop an SIP at any time, and the fund house has no say in this. If you are running on a tight budget, then you may also opt to pause your SIP for some time. All these come at no cost.
You can run multiple SIPs at a time
You can initiate and run SIPs into multiple mutual fund plans parallelly. Therefore, you can benefit from various mutual fund schemes at a time. However, you have to be cautious of the funds you have chosen to invest in.
Regardless of the mode of investment (SIP or lump sum), the same rules of taxation apply. Dividends offered by mutual funds are added to your overall income and taxed as per the income tax slab you fall under.
Taxation of equity funds
Equity fund units redeemed within a holding period of one year will result in short-term capital gains. These gains are taxable at a flat rate of 15%. You make long-term capital gains if you redeem your fund units after a holding period of one year. Long-term capital gains of up to Rs 1 lakh a year are made tax-exempt. Any long-term gains over and above this limit are taxed at 10%, with no benefit of indexation. Units purchased through SIPs are redeemed on a first-in-first-out basis, and the rules of taxation mentioned above apply.
If you invest in an equity fund for two years and decide to redeem all your investments at once at the end of two years, then the gains from the units that have been held for more than one year are taxable as long-term capital gains while the rest is taxable as short-term capital gains.
Taxation of debt funds
Debt fund units redeemed within a holding period of three years result in short-term capital gains. These gains are added to your income and taxed as per the income tax slab you fall under. Long-term capital gains are realised when you redeem your debt fund units after a holding period of three years. These gains are taxed at a rate of 20, with the benefit of indexation.
If you invest in a debt fund for four years and decide to redeem all your investments at once at the end of four years, then the gains from the units that have been held for more than three years are taxable as long-term capital gains while the rest is taxable as short-term capital gains.
Taxation of hybrid funds
If the equity exposure exceeds 65%, then the rules of equity funds taxation apply. If not, then the fund is taxed like a debt fund.