As per data released by the Association of Mutual Funds in India (AMFI), SIP (systematic investment plan) accounts stood at around 8.76 million in May 2024. The total amount collected through SIPs amounted to ₹ 20,904 crore in May 2024. SIP investments are extremely popular in India, and their popularity is greatly due to the convenience that they offer and how they help investors leverage the power of compounding. The 13 key features of SIP investments mentioned in this article can help you finally start an SIP investment (if you haven’t already) and finetune your ongoing investments if you are already on an SIP investment journey.
13 things you must know about SIPs
Here is a list of 13 key features of SIPs. Please note that in the following section, the term ‘SIP investments’ is synonymous with ‘mutual fund investments’. Read all the points to understand the distinction between SIPs and mutual fund investments –
1.SIPs help you invest fixed amounts in an investment scheme regularly: An SIP investment is one in which you can choose to invest a fixed amount (can be as low as ₹500 per month) in a mutual fund scheme at regular intervals. The fixed amount is debited from your savings account every month. You can also choose to automate your SIP contributions via your bank’s mobile banking app. Over time, SIPs leverage the power of compounding to help you steadily grow your wealth.
2. They constitute a convenient and secure method of investing in mutual funds: You can invest via SIPs in a mutual fund through your bank’s mobile banking or internet banking services. It’s a very secure mode of investment.
3. SIP returns are taxable and are taxed differently depending on the fund in which you are investing: Your SIP investment returns will be taxed depending on the category of mutual fund in which you are investing. Equity fund units, for instance, if redeemed within a year of investing, require you to bear 15% tax on your gains.
4, You can choose to stop an SIP investment whenever you want: You can quit an SIP investment whenever you wish to do so. After stopping your SIP investment, you can choose to redeem your money or continue to remain invested in the fund.
5. Tax-saver SIP investments come with a few restrictions, but help you save tax: ELSS (equity-linked savings schemes) mutual funds are also called ‘tax-saving funds’ as they help investors benefit from a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. However, they have a three-year-long lock-in period.
6. You can choose to increase or reduce your SIP contributions at any time: You can use the ‘step-up SIP’ option offered by mutual funds to increase your SIP contributions by a fixed percentage or amount.
7. You need not visit a mutual fund house to start an SIP investment: You can start an SIP investment directly from your phone.
8. Most SIP investments do not have a lock-in period: Open-ended SIP investments do not have a lock-in period. There are exceptions, however, such as ELSS funds.
9. Depending on the mutual fund in which you are investing, you might be required to pay exit load charges: Your SIP investment’s exit load depends on the mutual fund’s category. Most funds have an exit load of 1%.
10. SIPs are capable of helping you earn higher returns when compared to FDs or RDs: If you invest in a high-risk, high-return equity fund via SIP, there is a probability of you earning higher returns via that investment when compared to an FD (fixed deposit) investment.
11. SIPs are ideal for long-term investments: SIP investments are not impacted by short-term market volatility. Therefore, they are best suited for long-term investments in mutual fund schemes.
12. SIPs are different from mutual fund schemes: Individuals often confuse SIP investments for mutual fund investments. Remember that SIP is the mode of investing in a mutual fund scheme and not the scheme itself.
13. Steps to follow while choosing an SIP investment:
Key steps that you must follow include –
- Note down your investment goals.
- Select a few mutual funds based on your goals and compare them using a mutual fund SIP calculator.
- Assess the risk involved as well as taxation and use the SIP mode while investing.
In conclusion, SIP investments constitute a mode of investing in mutual fund schemes that helps you earn significant returns in the long run and also offers important tax benefits.