Systematic Investment Plans, as the name suggests, is a method of regularly investing in mutual funds. The amount can be as small as INR 500 and up to any amount you wish. It can be invested weekly, fortnightly, monthly and quarterly as per your convenient. Regularly paying a small amount over a long-term such as 20 to 25 years will deliver a lump sum which would be hugely helpful for your requirement. Hence starting at the early stage of your career helps you earn a better return when you head towards retirement.
How to Invest in a Systematic Investment Plan (SIP)
Investing in mutual funds through SIP is similar to a recurring deposit except that the returns could vary in the former depending on the market conditions. However, the compounding and average rupee costing help you get the benefits much more than you can get on a recurring deposit.
You can invest in an SIP either by applying through a bank, online or with a Demat account. You may have to submit your KYC documents and the mandate to open an SIP account. Before choosing and SIP, it is important to do a background research on what plan is best for you and the benefits you get from the plan.
Equity mutual funds are tax free while debt mutual fund will attract tax at the rate of 20% with indexation benefit. The equity mutual funds generally have high risks when compared to other type of mutual funds. Hence you need to choose the mutual fund plan based on your income, risk profile and goal attached to it. Longer the tenure, better the compounding works.
If you are investing in open-ended mutual funds, you won’t have lock-in period. You can stop the plan and obtain the returns based on the market position. ELSS mutual funds generally have 3 years of lock-in period wherein you cannot withdraw the returns before the date of maturity.
Features of the Systematic Investment Plan or SIP
♦The Systematic Investment Plan is a mode of investment by which fixed sums of money are debited into bank accounts by investors periodically and then invested in specific mutual funds.
♦The person using SIP will be allocated a certain number of unites in accordance with the ongoing Net Asset Value or NAV.
♦Each time a sum of money is invested, there will be more units added to the account of the investor