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Back to Basics: Everything You Need to Know About SIP Investment

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We get a lot of advice queries asking for the steps a beginner should follow to get started with Systematic Investment Plans.

There are a number of young investors, who have heard a number of success stories related to SIPs and are planning to invest,  but because they don’t have a lot of knowledge about how SIP works, they end up losing their newly earned money only to never to return to the SIP investment world again.

Well, worry no more. In this article, we will be taking you back to the basics – What is SIP, what does it entail, etc.

Let us start our FAQ segment with the definition part first.

What is SIP

SIP or Systematic Investment Plan is a monthly way of investing in mutual funds. Instead of putting in a fixed amount of money in name of Mutual Funds at one goh, SIPs ask the investors to select an amount and then the amount gets debited from their account on a monthly basis to be invested in the mutual fund scheme of their choice. Then over time, the amount keeps getting accumulated and growing with the power of compounding.

Is SIP Safe?

SIP is one of the safest modes of investment in the present time. Unlike shares and mutual funds where you put in the whole bunch of money one time and leave it up to the market to grow or fall, SIPs divides the amount into 12 parts and save you from the market volatility, thus proving themselves to be a nearly risk-proof mode of investment.

Is SIP Tax free?

It depends on the  type of mutual fund scheme chosen. If you choose an ELSS mutual fund scheme, you will be able to save on taxes and can claim deduction up to Rs.1.5 Lakh under the Section 80C. Now talking of returns, while the equity mutual fund returns come with tax-free benefit if redeemed after one year of investment, if you redeem the same before a year, you will be supposed to pay tax on 15% of the gain.

Can SIP be stopped?

Yes. Unlike Fixed Deposits and PPFs, anytime you feel that you don’t have enough money in your account from which SIP is getting debited, you can stop the payment for that month. This benefit of starting and stopping SIPs as per the investor convenience is what makes them the best form of investment among newbie investors.

Does SIP has a lock-in Period?

It again depends on the type of mutual fund you choose. If you are investing in the open-end mutual fund scheme, there will be a zero lock-in period on SIP. But on the other hand, there are funds having lock-in period as well, as the ELSS type comes with a lock-in period of 3 years.

The mutual funds that have a lock-in period are known as close-ended mutual funds.

Is there an Exit Load in SIP?

The SIP Exit Load depends completely on the mutual fund. Most of the equity funds come with an exit load of around 1% when redeemed before one year from the investment and no exit load when the redemption period is after one year. The amount of exit load is computed on the value that has to be redeemed.

How does SIP stack up Against RD? SIP vs RD?

SIPs offer a lot higher returns than RD. The return that you get through SIP is not fixed like RD, it can be a lot higher depending on how long you stay invested in it and what the market conditions are when you are redeeming your amount.

Is SIP meant for Long Term?

Yes! In fact the more you stay invested in the market, the greater would be your SIP returns through the power of compounding and ultimately the greater will be the benefits that you are able to garner at the back of the investment.

So, here were the questions that we get asked very often from the young investors who are just starting with the world of investment. Now that you know what SIP is and what it entails, don’t wait. You can start earning great returns from this very second.

Get in touch with our team of SIP experts to get started with the mutual fund investment.

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