5 Things you should know about Mutual fund SIP
By
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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