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Frequently Asked Questions on Systematic Investment Plan

    IndianMoney.com Research Team | Tuesday, April 07,2009, 11:23 AM
 

1. What is Systematic Investment Plan (SIP)


Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. The investor is allotted units on the date of the respective cheques at the applicable NAV. An SIP is simply what its name suggests; a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular saving schemes like a recurring deposit. An SIP allows you to buy units on a given date each month, so you can implement a saving plan for yourself. Once you have decided on the amount you want to invest every month and the mutual fund scheme in which you want to invest, you can either give post-dated cheques or standing instructions to your bank, and the investment will be made regularly.

2. How do I open an account with the fund?


Investing in a mutual fund involves risks. The first step is to obtain and read the fund prospectus carefully. The prospectus contains information on the investment objectives and potential risks of investing in the Fund, as well as other useful information.Once you have read and thoroughly understand the prospectus, you will need to complete an application and select the fund or funds you wish to invest in.

3. Can I purchase the fund through my broker?


At this time you can only open an account directly with the fund. You can purchase the fund direct or you may use a broker who carries the fund.

4. Are there any sales charges or loads on the fund?


Each fund offers only No-Load shares to the public. No-load shares are sold at net asset value without an initial sales charge. That means that 100% of your initial investment is placed into shares of the Fund.

5. What is the minimum investment?


If you do a one time investment, the minimum amount that you have to invest is Rs 5,000.If you invest via an SIP, the amount drops. Each fund has their own minimum amount. Some may keep it at least Rs 500 per month, others may keep it as Rs 1,000.

6. Can I setup automatic deposits into my account?


Yes, you may purchase shares of the Funds through an Automatic Investment Plan. The plan provides a convenient way for you to have money deducted directly from your checking, savings, or other account for investment in shares of the Funds. You can take advantage of this by completing the Automatic Investment Plan section of the account application.

7.The performance of an investment depends on correctly timing it. Should one therefore not invest at an opportune time?


When we look at history, we can always say when we should have bought and when we shouldhave sold. In reality, it is tough to say which the right time is. When the market is up, everyone is keen to buy, and they often end up buying at a high price. When the market is down, people panic and hurry to sell. Therefore, while the ideal is to buy low and sell high, in reality, many investors end up buying high and selling low. The better choice is to invest without taking a call on the 'right time'. An SIP allows you to do this. The advantage is that you will capture the movements of the market, having invested at every level.

8. How does a SIP work when the market is moving up and down?


The SIP is a nice method to reduce your average cost, even as you deal with fluctuating markets with relative ease. When you invest a fixed amount every month, the number of mutual fund units you actually buy depends on their market price. Therefore, with the money you invest each month, you can buy more units when the market moves up and less units when the market moves down.

This means you are averaging out your cost. If you invest Rs1,000 a month at a price of Rs20 a unit, you will have bought 50 units (1,000/20). But at a price of Rs10 per unit, you will have bought 100 units (1000/10). Investing a fixed sum regularly, means averaging out the cost, as you get fewer units when the price goes up and more when the price goes down.

9. What are advantages of SIP?


Advantages of SIP are as follows:

Power of Compounding
SIP helps you to start investing at an early age to meet the greater expenses of your life. Saving a small sum of money regularly makes money work with greater power of compounding with significant impact on wealth accumulation.

Rupee Cost Averaging
SIP minimizes the effects of investing in volatile markets. It helps you average out your cost by generating superior returns in the long run. It reduces the risk associated with lump sum investments. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time ,thus the average cost of your investment is often reduced.

Convenience and Regularity
SIP gives you the convenience to pay through Axis Bank Electronic clearance service (ECS) or Auto Debit. You can decide the amount and the mutual fund scheme. A fixed amount will automatically get debited from your account on a date specified by you.

Disciplined approach towards investment
Since you invest regularly, it makes you disciplined in your savings, which leads to wealth accumulation. Disciplined investing is vital to earning good returns over a longer time frame.

10. How to invest in SIP?


The various steps involved in SIP process are :
Step 1:
Select a mutual fund scheme of your choice with the payment option as SIP

Step 2:
Decide the Investment periodicity (frequency of making payments). You can choose to make your investment on a monthly or quarterly basis.

Step 3:
Select the minimum investment amount. For instance, if you choose to invest Rs 12,000 every year with a monthly SIP Option. Therefore you would be investing Rs 1,000 every month in your fund. By the end of a year, you would have invested Rs 12,000 in your fund.

Step 4:
The amount gets converted into units, depending on the Net Asset Value (NAV). NAV is the market value per unit of a fund. If the NAV in the first month is Rs 20, you will get 50 units. Similarly in the next month if the NAV is Rs 25, you will get 40 units. The following month if the NAV is Rs 18, then you will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit.

Step 5:
The units get accumulated over a period of time. You can stay invested till the time you wish and redeem your units when you wish to exit from the scheme. The units are redeemed at the market value (NAV) and you get back your money with returns.

11. Is there a load?


An exit load is a fee you pay the fund when you sell the units, just like the entry load is a fee you pay when you buy the units. Initially, funds never charged an entry load on SIPs. Now, however, a number of them do.

You will also have the check if there is an exit load. Generally, though, there is none. Also, if there is an entry load, an exit load will not be charged. An exit load may be charged if you stop the SIP mid-way. Let's say you have a one-year SIP but discontinue after five months, then an exit load will be levied. These conditions will wary between mutual funds.

12. How often does one have to invest?


It would depend on the fund. Some insist the SIP must be done every month. Others give you the option of investing once in three months or once in six months.

They also give fixed dates. So you will get the option of various dates and you will have to choose one. Let's say you are presented with these dates: 1, 10, 20 or 30. You can pick any one date. If you pick the 10th of the month, then on that day, the amount you have decided to invest in the fund has to be credited to your mutual fund.

13. How must the payment be made?


You can opt for the Electronic Clearance Service from your bank; this means the mutual fund will, as per your instructions, debit a certain amount from your account every month.

Let's say you have a SIP of Rs 1,000 every month and you have chosen to invest in it on the 10th of every month. Under this option, you can instruct your mutual fund to directly debit your bank account of Rs 1,000 on the due date.

If you don't have the required money in your account, then for that month, no units will be allocated to you. But, if this continues periodically, the mutual fund will discontinue the SIP. You need to check with each mutual fund what their parameters are.

Alternately, you can give cheques to your mutual fund. In this case, they may ask for five Post Dated Cheques upfront with your first investment. Since these cheques are dated ahead of time, they cannot be processed till the date indicated.

14. Must I state for how long I want the SIP?


Yes. You will have to state whether you want it for a year or two years, etc. If, during the course of this period, you realize you cannot continue with the SIP, all you have to do is inform the fund 15 days prior to the payout. The SIP will be discontinued. You can continue to keep your money with the fund and withdraw it when you want.

15. Do all funds offer SIP?


No. No. Liquid funds, cash funds and floating rate debt funds do not offer an SIP. These are funds that invest in very short-term fixed-return investments. Floating rate debt funds invest in fixed return investments where the interest rate moves in tandem with interest rates in the economy (just like a floating rate home loan).

All types of equity funds (funds that invest in the shares of companies), debt funds (funds that invest in fixed-return investments) and balanced funds (funds that invest in both) offer a SIP.

16. What are implications of Tax?


Let's say you have invested in the SIP option of a diversified equity fund. If you sell the units after a year of buying, you pay no capital gains tax. If you sell if before a year, you pay capital gains tax of 10%. Let's say you invest through a SIP for 12 months: January to December 2005. Now, in February 2006, you want to sell some units.

17. How will an SIP help?


When you buy the units of a fund, you may do so when the NAV is really high. For instance, let's say you bought the units of a fund when the bull run was at its peak, leading to a high NAV.

If the market dips after that, the value of your investments falls and you may have to wait for a long while to make a return on your investment. But, if you invest via a SIP, you do not commit the error of buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time.

You will end up buying some units at a high cost and some units a lower price. Over time, your chances of making a profit are much higher when compared to an one-time investment.

18. If I miss investing for a particular month, will they prosecute me?


Now, this is the fear of EMI that people have. In an SIP you are buying an investment every month (or quarter), there is no question of prosecuting you for missing one investment. As a matter of discipline, you should not miss any month; however, missing one month’s investment is not a crime!

19. When you have a surplus (accumulation stage of your life) you should do an SIP and during retirement you should do a Systematic Withdrawal Plan (SWP)?


No. You should ideally keep your withdrawals only from an income fund or a bank fixed deposit. You should sell an equity fund on some other basis, say deciding to sell 20% of your portfolio in a year so that the return is 4 times the 30 year historic return. SWP, by definition cannot work in an equity fund!

20. Is SIP only for small investors?


Nothing can be farther from the truth. I have a client who has invested Rs 32.66 lakhs using SIP, starting from January 1998 till date. Obviously, he has invested much more in later years as his income went up and the funds together are worth Rs 97 lakhs, substantially higher than his provident fund.

21. All fund houses are now charging a full load on the SIP, so now SIP will not work Why not time the market?


Introducing an entry load was expected to happen and it has happened. What actually hurt the retail investor are the asset management charges – 2.5% in most cases is a bigger threat to compounding!

22. If I do an SIP in a tax plan, can I withdraw all the money on completion of 3 years?


Another regular question almost! Every installment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules, which say that a tax saving scheme should have a 3-year lock-in. You cannot escape that by doing an SIP!

23. What is NRI SIP?


An investment method wherein the investor invests a particular amount periodically

. Similar to a conventional recurring deposit, SIP is a method of investing regularly in a mutual fund

. Allows investor to buy units on a particular date, say 15th, of every month.

. Investor decides the amount and also mutual fund scheme.

. Investor doesn’t have to worry about declining market as she/he can buy more units with the same capital when the market is falling!

. Investor automatically becomes a part and parcel, and begins participating, in the market once s/he begins with SIP.

24. How can an NRI invest in a SIP?


Now that we have told you about SIP, what exactly it is, its features and benefits, we will now proceed to tell you how to invest in SIP. SIP guarantees returns, but how you invest makes a difference. Hence the section on how to invest is described below.

. Choose from a range of equity and debt schemes offered by the company

. The periodicity of SIP can be quarterly or monthly.

. Amount can be deducted electronically from your NRI Bank account every month.

. You will get monthly statements in your email or at your local Indian address.

25. Will i be charged capital gains tax?


The system of first-in, first-out applies here. So, the amount you invest in January 2005 and the units you bought with that money, will be regarded as the units you sell in February 2006. For tax purposes, the units that you sell first will be considered as the first

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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