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Novices guide to SIPs

Pubali Neogy
SIPs are the safest way to earn good returns on investment. What’s more, they do not require you have a susbtantial amount of money at the time of investing

If you desire to earn relatively high returns from investing your money and yet do not have the courage to bet big on the market, simply go for mutual funds. It has many benefits. First, it saves you the hassle of keeping a finger on the pulse of the market as experienced fund managers carry out the task for you.

Second, depending upon your risk appetite, you can chose a fund that invests in various proportions in stocks and debt. Funds with greater risk have more amounts invested in stocks than in debt such as bonds and fixed deposits. Then there are purely equity and debt funds and a clutch of others such as balanced funds, specialty funds, etc. to choose from.

Third and most important, it is comparatively less risky as your money gets invested in stocks and bonds of different companies. The process is called diversification. Compare this with betting on the stock or bond of a single company which can cause you to lose the entire amount in case the company underperforms.

Systematic investment plan (SIP) – a method of investing in mutual funds

There are two methods of investing in mutual funds. You either invest the entire amount at one go or do it through a systematic investment plan (SIP). In the latter method, a stipulated amount is debited from your bank account at regular intervals – either weekly, monthly or quarterly – to be invested in mutual funds. It’s like a recurring deposit where a fixed amount is invested periodically.

To enrol in a SIP, you are required to provide a NACH (National Automated Clearing House) mandate from NPCI (National Payments Corporation of India) form along with the common application form. Your bank will then debit the specific amount in favour of your chosen fund on fixed dates automatically.

Based on the Net Asset Value (NAV) of your funds, which is the market value per unit of the fund arrived at by dividing the sum total of the market value of all shares held in the portfolio minus the liabilities, you are allocated certain number of units.

Every time you invest, more units are added to your account based on the ongoing market rate or NAV. Your fund manager buys more units when rates fall and less when prices go up. This is called rupee cost averaging. This serves to bring down the average cost per unit of investment in SIPs.

Duration and minimum required amount

The best part of SIPs is that you don’t need to bet a substantial amount. While each fund has its own minimum amount, it could be as less as Rs500 a month. However, most require you to put in at least Rs.1000 a month. Besides, you also have the option to increase or decrease the amount of SIP anytime.

Investment through SIP can be done for a minimum period of one year. However, you will have to mention the duration for which you want to invest in SIP. If, at any time, you wish to discontinue SIP, then you need to inform 15 days prior to the payout. Your SIP will then be discontinued and the money can be withdrawn as and when you require.

Capital gains tax

Yes there is one. There is also a brokerage fee. So your returns will be deducted.

SIP calculators

Online, free SIP calculators are available to help investors calculate their returns by changing the variables. One thing you need to keep in mind is that the calculator factors in the capital gains tax.

Possible returns

Now coming to the most important part – which are the best funds to invest in at present and how much returns can one expect from them. Birla Sun Life Frontline Equity Fund (generated 18 percent annualised returns in the past five years), ICICI Pru Top 100 Mutual Fund (provided annualised 17 percent returns in past five years), ICICI Pru Focussed Blu Chip Funds (returns have hovered around 16 percent in the last five years), Franklin India Smaller Companies Fund (generated a jaw dropping 29 percent returns in the past five years) are to name a few promising ones.

Overall, the small and mid cap funds have, in general, provided better returns than large cap funds. There are sector-wise funds as well, i.e., they will invest in the funds only of a particular sector. In this case the sector’s performance will be a bellwether of the fund’s performance.

In India SIP is offered by most of the well-known Asset Management companies, namely SBI, ICICI, UTI, SUNDARAM, HDFC, Birla, Kotak, TATA, Reliance, etc.

Now armed with the basic knowledge, time you tried SIPs.