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Systematic Investment Plan

What is systematic investment plan?

A systematic investment plan more popularly known as SIP is a method to invest in mutual funds through a series of regular and equal payments. In simple term an SIP is basically an EMI that you pay not to payback your loans but for savings and investment. SIP’s can be start from Rs. 500 which make them easily accessible for anyone who wants to start investing.

Dollar Cost Averaging & other important benefits

SIP gives the investors the significant advantage of dollar cost averaging. An automatic-purchasing schedule is required for creating the DCA strategies. The foremost advantage of DCA is that it removes the negative feelings from the minds of an investor and allows him to take concrete business decisions. On other side, it is believed that an investor whose mind gets preoccupied with greed, complacency and other negative feelings becomes incompetent to survive in business.

It is generally observed that an investor invest more in risky funds when its prices rise and also gets encouragement after getting information about positive new records in shares. But when the prices of stocks decline for a longer period of time then investors sell their shares. For long-term investors, buying high and selling shares at low cost is in direct difference with dollar-cost average.

Those set of shareholders who are planning for investing in variable amounts then dividend reinvestment plan is the best way of creating long term investment. These dividends also allow the shareholders to purchase shares or proportion of shares in publicly traded companies. It enforces the company, transfer agent or brokerage firm to use the money for buying additional shares of the company in the name of investor. Moreover these set of DRIP’s are known for being commission free because no broker is required for facilitating the business. At the rate of (1to 10%) discounts some DRIPs offer optional cash purchases. The flexibility of DRIPs allows the investors to invest large or small amounts of money.

Many shareholders who purchase SIP’s schemes are often privileged to uphold stable purchases and these plans also have stipulations. Furthermore, these schemes also require a long-term commitment of the time duration from 15 to 25 years. In some cases, shareholders who quit the plan before its end date can incur hefty sales charges. Systematic plans are also termed to be the costly. Besides this, “creation and sales charge” can also account for half of the first 12 months investment. During these kind of cases, investors should look out for mutual fund fees, custodial and service fees.

The main aim of the systematic investment plan is to safeguard the interest of investors by prohibiting them in entering the volatile markets which is run by Dollar cost averaging. The average cost per unit is assumed to be lower when less units are priced high in the long-run. SIP’s main aim is to encourage the disciplined investment. They are known to be flexible which allows the investor to stop investing in the plan anytime or can think of decreasing the investment amount.

Tax and Costs associated with SIP

Systematic investment plan is also known as the fixed amount of money which is debited by the investors in bank accounts for some time. As per the holdings of current NAV it allocates specific units to an investor. More units are added in the investor’s account whenever certain amount of sums are added. In the current financial year, long-term capital gains (LTCG) are taxed on equity and equity-oriented bonds.

The effect of taxation

According to the new regulatory frameworks, (LTCG) which is made on the transmission of equity mutual funds that have equity exposure of (65%) or more. Those set of shareholders who earn more than Rs1Lac may have to pay a (10%) tax as (LTCG). Moreover any purchase including the investments made after April 1, 2018 and 31st March, 2018 will be subjected to LTCG under the provision of new taxation laws.

For any mutual fund investor who holds the SIP units for atleast 12 months can be liable to pay tax on LTCG criteria. Shareholders can invest certain amount of money either through lump-sum or SIP route. It is a tedious and laborious task for any mutual fund investor.

Here is how you can calculate LTCG on MF units.

Shareholders can redeem the money in the form of lump-sum and can also invest by following the route of SIP. In systematic investment plans, there is a necessity on the part of investor to contribute a particular set of dollar amount on a frequently basis. With the help of two ways like easy saving and dollar cost averaging, one can easily invest in SIP. It is very easy to set up the SIP plan and especially for those set of people who are planning to save their money so that they don’t need to rely on anyone after retirement. The need for any person to flourish through SIP is to monthly invest in the small amount funds and then try to stick with the plan. By buying the shares of mutual fund on frequent basis, one can reduce the average cost per share. In those business markets where shares are purchased at lower price, there is a probability that fluctuations in markets will present opportunities. This technique is called as dollar cost averaging and it is widely used by many investor and is highly suggested to the shareholders by financial advisors.

Transaction Charges

Since the year 2011, SEBI has permitted AMC’s to gather a minimum charge of the investment if it goes higher than Rs10,000. It is considered to be the final one-time direct charge from then. In case the investment amount of shareholder is less than Rs. 10,000, then the shareholder will not be eligible for giving the tax.

Entry Load

Entry load is considered as the charges levied by an asset management company whenever a consumer purchases mutual fund is called entry load. It tends to increase the buying cost of consumer and it has been abolished for Indians by SEBI.

Things to look for SIP

  • From the perspective of many financial analyst, systematic investment plan is considered to be the best investment option for sustainable wealth creation for investors. Many investors get the suggestion for investing into mutual funds by using SIP because of the fact that they will able to overcome vagaries of stock market behaviour. But, on the other hand not all the SIPs work for investors. Some investors who have been regularly investing in the mutual funds have also claimed that SIP has helped them in getting the higher returns.
  • One never know how much cautious he remains to be while investing through SIP. There are chances of making a mistake between returns and SIP. An investor is always advised to remain prudent while investing through SIP. Thus there are few more steps that one should need to look for while investing in funds by SIP.
  • According to the financial analyst, every investor should observe the growth of investment for at least one time in six-months. It does not imply that they have to withdraw their investments from SIP in case when it is not performing. It is type of process which helps an investor to get the information about anything wrong which gets along with his fund. For an assumption, if the benchmark against anyone’s fund operates at 10% return and its SIP return is abysmally less. Then it may be the time for a shareholder to change his fund. As per the researched study by S and P CRISIL (SPIVA), it concluded that more than (50%) of large cap funds have been unsuccessful in beating the benchmark index against which they operate.
  • Investors are always advised to not initiate SIP in two similar kinds of schemes. It is advisable to investors to invest their money in different schemes of mutual fund. However it is seen that most of shareholders select almost same type of fund they chose before. Therefore it has become very important to find stocks like ITC, HDFC bank and many more such shares. Due to their longevity in financial markets these stocks are given higher preferences. Every new investor should check whether his invested funds has gained important exposure in similar stocks. In case, if the stocks of shareholder turn out be unstable performers then it might increase the chances for them.
  • For mutual fund investors it has become every easy to believe that by investing in star funds they can get the better returns. But it is also true that not all the star funds work as star performers in the business markets. Thus it is always advisable to conservative as well as aggressive investor to take a review about the funds’ past performances before they invest their money.
  • It is said that when an investor enters into the world of share-market then he is introduced with the significance of investing in funds by SIP. Thus we get an overall view about how SIP benefits the people including retailers, mid-level businessmen and aspiring entrepreneurs.

How to evaluate and study Systematic Investment Plans?

The systematic investment plans are considered to be flexible and easy investment plan. In these types of plans, money is directly debited from shareholders’ bank accounts and is invested directly into the specific mutual fund scheme. Shareholders are allocated specific number of units which are based on the ongoing market rate (NAV or net asset value). Whenever a shareholder invests money then the additional units of the scheme that he has purchased at the market rate are added to his account. Thus these units are purchased by shareholders at different rates and investors are also benefited from Rupee-cost averaging and the power of compounding.

Rupee-Cost Averaging

Many times when the fluctuations in markets occur and these fluctuations make business markets more volatile which in turn makes the shareholders more doubtful in regarding the best time to invest in shares. If someone is a regular investor then his money makes more units when the price of shares declines and becomes less when the price high. It may allow the shareholder to invest in those set of industries which hold the potential of giving them good returns.

Power of compounding

A very eminent scientist Albert Einstein once said, “Compound interest is the most powerful invention in the field of maths.” The rule for compounding is quite simple because its principle states that as soon as anyone invest in SIP there are more chances for his money to grow.

Investor’s dilemma

The hardest thing that comes in anyone’s mind about investment in the mutual funds is to understand the right type of fund. In SIP, an investor needs to keep a check on the funds’ performance and especially in the case of systematic investment plan. An annual check is also recommended to shareholders by financial analyst. Moreover, the data associated on the funds’ performance over the different time periods can easily help shareholders to gather the data of SIP period.

The Solution

The most arduous task for shareholders is to calculate the returns of SIP that at different periods of time. With the help of SIP Return Calculator which is available on one can easily calculate the rate of returns associated with the funds. It helps the shareholders in sorting the funds from different categories. Once the shareholder selects the fund in portal then he may come to know about SIP frequency, SIP start and end dates.

It is a type of tool that informs shareholders about the current worth of invested amount and the SIP returns in percentage. It provides shareholders an easy access to the data which is associated with the net worth of the invested amount and determines the SIP percentage. It is considered to be a great tool especially when shareholders want to compare the performance of their funds with someone else funds. It also guides a shareholder to decide between continuing a fund and switching to better-performing assets.

These are some of the best evaluation methods which can guide the shareholder to take the best funds.

Selecting the right amount to invest can be tricky and somewhat confusing for the new investors but we have a method to make this tuff and life changing decision easy for you.

  • Write down how much you earn every month
  • Note down all your expenses and subtract them from your income
  • Do the managers, owners and board have the interests of new shareholders at heart? It could be that they are simply looking for the big payoff. If the founders are selling more than 30% of the shares offered in the IPO, you can be fairly sure they aren't concerned about corporate governance.
  • After you subtract your obligatory costs from your income, you will get your disposable income.
  • You can invest any amount you seem will be appropriate in order to achieve your financial goals.

Or you can also take the buffet way:

“Spend what is left after saving, never save what is left after spending” –Warren Buffet

According to buffet and other greats in the investing world you should always save & invest first from your disposable income and then go out and spend on your wants. So if you are getting a salary of Rs 10,000 and your major expenses like rent, electricity & food among others equal up to Rs4000, then you should invest lets say 2000-3000 from the left earnings and leave the rest for you non essential expenses like going out for a movie,buying accessories etc.

Scheme Cumulative Investment till date Value of Investment as on 8.10.2015
Reliance growth Fund 9,00,000 81,65,866
Reliance Vision Fund 9,00,000 57,41,581
HDFC Equity Fund 9,00,000 62,73,817
Franklin India Prima Plus Fund 9,00,000 60,55,177
ICICI Prudential Multicap Fund 9,00,000 49,48,200
SBI Magnum miltiplier fund 9,00,000 59,14,700
HDFC Capital Builder Fund 9,00,000 55,46,546
UTI Equity Fund 9,00,000 46,39,930