One of the prominent investment options that are available in India is mutual funds. In these schemes, an asset management company or AMC pools money from numerous investors and deposits it in a fund. When you choose to buy a mutual fund scheme, you end up owning a small stake in all the investments that are considered a part of the fund. Because of the numerous benefits that are associated with mutual funds and their different variants, they are considered a prudent investment choice. But there is still a question that needs to be answered. How can one sign up for a mutual fund scheme?
To sign up for a mutual fund scheme you will have two options. Those two options are a lump-sum investment and a systematic investment plan (SIP). Under lump-sum investment, you are required to make a one-time payment. So, if you are going to opt for this investment mode, then, please make sure that you have access to the required investment amount. In case you don’t have access to the required investment amount and opted for the lump-sum option, then you need to hassle for arranging the money. So, lump-sum can be a stressful investment option. SIPs, on the other hand, work differently.
What are systematic investment plans?
Systematic investment plans are a mode of investment in which you can choose to allocate a fixed part of your income in a mutual fund scheme at regular intervals. With the help of systematic investment plans, you have the option of investing at different times such as once a month or even once a quarter. However, there is one thing you need to remember about a systematic investment plan. The said thing to remember is that you should have a long-term goal and therefore, it is better if you were to start as soon as possible.
How do they work?
As mentioned before, in firm contrast to lump-sum investments, SIPs are monthly payments. For the purpose of paying for the mutual fund scheme, you can request the bank to enable automatic deductions of a fixed amount from your bank account at regular intervals specified by you. This feature makes sure that the payment for mutual funds investment goes through smoothly even if you were to forget the date.
Are there any benefits that are associated with signing up for SIPs?
Listed here are some of the advantages that are associated with systematic investment plans:
- Rupee Cost Averaging:
One of the most notable features of SIP is the feature of rupee cost averaging. With the help of this feature, you can buy more units of the mutual fund scheme whenever the market is going through a bear phase. On the other hand, in this feature, you buy less when the market is performing well.
- SIPs also come with the benefits of compounding:
When you allocate funds to mutual funds regularly through SIPs, the income generated through the mutual fund scheme gets reinvested. With time, this results in a snowball effect, thereby increasing your income manifold. You can make the most of this feature by choosing to invest for an extended period. SIPs operate on the principle of compound interest. In simple words, a small amount invested for a long time fetches better income than a one-time investment.
- These plans are flexible:
Another feature of systematic investment plans is that they are known for coming with tremendous flexibility. Also, systematic investment plans don’t have a fixed tenure. So, in case you opted to sign up for a systematic investment plan, you can choose to withdraw your money whenever you want. Also, the amount of investment in a SIP is also flexible. Depending on your financial situation, the amount of investment can be increased or decreased.
Are SIP taxed after withdrawing?
Yes, while withdrawing your returns will be taxed. In case your SIP is held for less than 12 months, a short-term capital gain is taxed at 15%. Conversely, if a SIP is held for over 12 or more than 12 months, then, a long-term capital gain is taxed at 10% for more than ₹1,00,000/-.