What SIP Investment Plans Are Best from Fixed Plans?

You have been advised by your brokers to start investing in a SIP, and you are also clear on the benefits that SIP offers over a lump sum investment in the mutual fund. However, you will need to know a few things like how to invest in SIP before you start putting your hard earned money into one.

The mutual fund industry has promoted their SIP plans in a big way making investors believe that it is the best financial instrument to put their money into. However, there are a few things that you should be sure of before you know how to invest in SIP.

SIP And Lump Sum Investment

SIP and lump sum investment in mutual funds are the same. They let you buy the units that are equivalent to the value per unit of the amount that you have purchased with your money. The purchase amount is the product of the units allocated and the NAV that is there on the date of purchase. In a lump sum investment into a mutual fund, you invest once, and you thus buy the units at one go. In a SIP plan, you keep investing continuously and thus keep buying units into the mutual fund plan over and over again using the same formula.

Redemption

The ways to redeem a SIP and lump sum amount and the benefits on redemption may not be the same. The SIP investment does not become tax-free after a year. If you have chosen an equity fund to invest in then the first-month instalment will become tax-free after a year, the second month’s instalment one month later and so on. The SIP can be started for your recurring goals, but it is not true that all your gains are tax-free one year after you started your SIP. Exit load of the scheme will also be applicable to each unit separately.

3-Year ELSS SIP

In case you have started a 3-year ELSS SIP it does not mean that it can be redeemed three years after you have paid the first instalment. Remember that every instalment that you have paid will be locked for three years.

Mutual Funds Are Not Insurance Policies

Before you know 

how to invest in SIP, understand that mutual funds are not a kind of an insurance policy. Most people will ask that they want to start a SIP for say 30 years and will ask for some best funds to invest into. Understand that mutual funds are not like an insurance policy where you keep paying a set premium amount for a set number of years to get the maturity value at the end of the term. If you continue to invest in the same fund for 30 years, then there is a high chance that your returns will be very low. So when you start a SIP also know when you should stop it.

Money Back Policies. Are They?

How to invest in SIP will let you know that when you buy a mutual fund, you buy the units in the fund. When you plan to exit the investment you sell the units you hold at whatever the current NAV is. The value that you get is the product of the current NAV and the units. The value that you receive may not necessarily be more than the amount that you had invested in the fund. The mutual fund does not guarantee you that you will receive back all the money that you had invested in the fund. In other words, they do not guarantee you the return.

No Guaranteed Returns

Most mutual fund investors will give you the answer that they plan to invest for decades in the market and thus the market getting below their purchase price is something that cannot happen. However, a long-term goal may also become a short-term financial goal. The Indian economy should grow and all of us are bullish about it but your fund will give you returns when you want is something that cannot be guaranteed. It is important that you actively manage risk when investing in equities.

Minimize Risk With SIP

SIPs only average put your investment; they do not minimize the risk. They buy the units sometimes at a lower NAV and sometimes at a higher NAV. The total amount that you have invested in the market is only subjected to the full volatility in the market.


Before you find out how to invest in SIP, it is important to first know and research the pros and cons of investing in mutual fund SIPs. Just by opening a SIP and starting to put regular money into it does not guarantee you a long-term profitable return.