What Makes SIPs So Famous in India?

The last few months have been testing times for equity SIPs as the market has been extremely volatile due to coronavirus. Equity SIPs have under-performed bank FDs due to the sharp correction post-January this year. Many investors, who are dealing with salary cuts and loss of income, are looking to stop their SIPs due to income shrinkage.

Stopping SIPs is not advised by financial planners and investment experts. The mutual fund industry is allowing savers to hit the pause button on their investments for some time. They can now pause their systematic investment plans (SIPs) if they are going through a tough time due to unemployment or pay cuts.

7 Reasons Why SIPs Are So Popular

Here 7 things that you must know about your Mutual Fund SIPs:

You Can Pause Your SIPs 

The facility to pause SIPs temporarily has become extremely important after the lockdown resulted in job loss and pay cuts. It is not a new facility as SIPs could be stopped even before but the process took around a month. However, post the pandemic crisis, mutual funds are now providing an online link on the website wherein investors can authenticate electronically and halt their SIPs for a certain period of time. 

One must remember that SIPs are your platform for attaining long term goals. So, in times like these, it is best to temporarily pause SIPs than stopping them and liquidating MF units prematurely.

Step-up SIPs

A step-up, also known as a top-up SIP can help you increase your investment in line with your income level. People often start with a small SIP amount initially as their income is low at the beginning. However, it is advised that you align your SIPs with your income levels to reap better returns.

SIPs During Falling Markets

It might sound ironic but SIPs actually work best in falling markets and there is a logic to it. When you run a SIP in a falling market, each month you are getting more SIP units for the same monthly SIP investment. This helps in rupee cost averaging and reduces the overall cost of the SIP.  On the other hand, in a market that is moving up, a lump sum investment in equity funds would work better. This is a good time for you to stick to your investment despite the volatility.

SIPs On Equity Funds And Debt Funds

Some investors often fall for the misconception that SIPs can only be done with equity funds. However, this is not the case. Investors can run SIPs on equity funds, as well as, debt funds. Your choice would depend on your financial goal and investment horizon, tenure. If your long term goal is to create wealth, then SIPs on equity funds is more meaningful as they help generate good returns over time. Debt funds tend to be relatively more stable and are a better option for short-term financial goals. Also, when gilt funds or bond funds show volatility, you reap RCA benefits in debt fund SIPs too.

 Insurance With SIP

A lot of investors are not aware that they can attach insurance to their SIP. In order to promote investment through SIP, several mutual fund houses have come out with additional facilities of life insurance cover embedded into SIPs. Note that the concept of this investment is the same as that of normal SIPs, the only addition is that investors get a free life cover.

Each SIP Is A Separate Transaction For Exit Load

If you have ever sold some of your mutual fund investments, you must have noticed that the redemption amount is a little less than what you may have expected. This is most probably because it went towards an exit load as Mutual funds charge an exit load on redemptions before a stipulated time period. Exit load is charged as a small per cent of the Net Asset Value (NAV) prevailing at the time when you sell your schemes.

SIP Taxation

Unlike lump sum investments where there is a single investment, SIP investments are made in installments over multiple dates. While you may think of a one-year SIP as one investment. For tax purposes, each installment is considered a fresh investment. Accordingly, the holding period for each installment is calculated.

Conclusion

One must remember that SIPs are your platform for attaining long term goals. So, in times like these, it is best to temporarily pause SIPs than stopping them and liquidating MF units prematurely.

Also Read: What Is Short Term Insurance Cover