5 Things you should know about Mutual fund SIP

Dear Reader,

Thank you for tuning in and investing your time with us, yet again. 

The ‘Mutual fund Sahi Hai’ campaign helped to invest via SIPs garner a lot of attention over the past few years. 

The truth be told a lot of investors are investing in these funds without clear understanding or knowledge and trust us there are plenty of things you are not aware of yet. 

Let’s have a look at 5 things that you ought to know about Mutual fund SIP and maybe correct some of our wrongdoings?  

1) No Goal. No Glory

SIP is certainly a great way to get started with investing. But the problem lies in the fact that most people do not define the ‘Why’ behind their investments.

Whether it is seeing our children getting the best of education at the most reputed university or taking our family on a trip to Paris or maybe being a bit selfish and thinking about our retirement, you need to have a goal in mind. 

To prepare a great dish, you need to have the right ingredients in place. 

So, apart from the actual goal, you also need to know the ‘monetary value of the goal’ – 10 lakhs? 1 crore? as well as the ‘timeline’ in which you wish to achieve them – 5 years? 10 years?

Both are extremely crucial factors in deciding the financial instrument you invest in. Along with this be aware of the current and future cost of your goal. (Inflation will always stick around you)

Ever wondered what the consequences would be of not having a goal?

In the words of late American poet Bill Copeland:

“The trouble with not having a goal is that you can spend your life running up and down the field and never score.”

and dear investor, you surely do not want to be on the receiving end of things.

2) Avoid stopping your SIPs during a market correction

As most experts would say, a falling market is a great time to invest. 

You get quality at cheap prices.

A fall in the equity markets helps a long-term investor use the SIP route to accumulate more units with the same amount of money.

Mr. Tyagi started a SIP of Rs 10,000 in March 2020. COVID-19 laid its feet in India and the market started tanking

However, later, thanks to a huge amount of liquidity, markets soared to new highs and as we write this blog, Nifty has touched the 14,000 mark.

The above image clearly states that during the falling market the SIP Investment accumulated more units which resulted in the value of Rs.1,74,040 at the same investment of Rs.1,20,000.

Clearly, in the long term, the market moves only in one direction - Bullish

But dear Investor, as much as we love SIPs, we say ‘Avoid stopping’ because we understand that there are certain unavoidable situations where you are forced to stop your investments and it is simply fine. 

In such circumstances instead of canceling your SIPs consider pausing them for a certain period.

3. Your promotion should reflect in your SIPs

Got a raise off late?

Well, we all love getting a raise or promotion for the hard work we put in, don’t we?

After getting the extra bit of money in your kitty you need to see that it is put to the right use. 

With some extra cash in hand, it is a human feeling of getting tempted to spend it.

But look at it from a different perspective: Why not use that raise to increase your SIP?

You see increasing the SIP amount each year by even 5% can have a drastic effect on your final goal amount.

A 10% increase in your SIP means achieving 8 lakhs more when you consider 10 years as the time frame. When the increase is 15% the result is a long-term corpus that is almost three times bigger.

Well, that certainly is mind-boggling but the truth.

4. SIPs are for both equity and debt funds 

Some investors are under the misconception that SIPs can only be done with equity funds. 

Well, this is not the case. Investors can start SIPs on equity funds, as well as debt funds. 

If your long-term goal is to create wealth, then SIPs in equity funds make sense as they help generate good returns over a longer period. Debt funds tend to be relatively more stable and are a better option for short to medium-term financial goals.

Always remember, equity is meant to create wealth, and debt is meant to protect that wealth

5. The SIP Tax Conundrum

Unlike lump-sum investments where there is a single investment, SIP investments are made in installments over various dates.

You may think of a one-year SIP as a single investment. But that’s not how the folks at the income tax department look at it.

For tax purposes, each installment is considered a fresh investment. Accordingly, the holding period for each installment is calculated.

For eg: If you start a monthly SIP in an equity scheme on let’s say 1st January 2020 and on 2nd January 2021, you decide to redeem your entire investment, in this case, only gains on the units purchased from my first installment (invested on 1st January 2020) will be long-term capital gains as they have been held for a period greater than one year. Since the holding period for the remaining units is lower than one year, the gains will be taxed at short-term rates.

Bonus tip:

Now as you’re aware of your financial goals, the cost behind them, determining a suitable fund and SIP amount is the key to getting started with your wealth creation journey. 

Remember, dear reader, each goal is a different journey altogether, and mixing up one goal with the other must be avoided.

If you would like some assistance or a helping hand in your investing journey do Feel free to get in touch with us.

Until Next time.

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