A couple of days back, I got a call from a friend who was all confused about this thing called SIP. He asked me, “Boss, ab yeh SIP kya naya cheez hai? [Translation: What is this new thing called SIP] and his next question was – “Is it a type of an insurance plan?”.
Hence, the intent behind writing this article is to answer his question and any doubts that might be lingering in the heads of other people regarding SIP. I will try to make it as precise and interesting as possible so that you don’t have to continuously sip on your coffee and keep your eyes open. 😛
First off, SIP expands into Systematic Investment Plan and to be very clear at the onset, it is necessary to understand that SIP is not an investment instrument but a style of investment that has been pioneered by financial institutions in order to instill the habit of saving and investing among people. Therefore, a SIP is nothing but a plan of investment wherein people are required to invest small amounts at periodic intervals rather than investing a lumpsum amount of money.
This very feature of investing in bits makes a SIP the safest mode of investment because the investor is not worried about the highs and lows of the market as his investment is spread over a large period.
Let me tell you something very interesting that is inspired by Warren Buffet:
“It is wasteful to attempt to beat the market because at the end of a particular period, the highs and lows in the market combine to give an average return, which is risk-free.”
Hoping that you would have got an understanding of a SIP [Yes, its not at all complex], I have prepared a set of Q&A around SIP that should answer most of your queries.
Q1. How do I begin a SIP?
Answer: Starting with a SIP is not complicated at all as you can just go to your bank/stock broker or any mutual fund house and fill out the required documents. The investment in a SIP can be in two ways:
a. Electronic clearing service (ECS): As simple as an arrangement with the bank to deduct the desired amount from your bank account on a predetermined date.
b. Post-dated cheques (PDC): Payment is made via bank cheques and the amounts are deducted from bank account on dates mentioned in the cheques.
Q2. You mentioned “required documents”. Now, what are these?
Answer: Do not worry about it at all! Yes, the documents would be specified in the KYC form and other forms given to you. I do not want to scare you with a long list of documents by mentioning them now!
Q3. How much do I need to invest?
Answer: In India, if a car buyer asks “Kitna degi” [Not clear, watch this ad but after completing the article] then an investor asks “Kitna dena padega”. Well, in order to commence a SIP, the minimum investment required is Rs 500/-. Yes, that is it!
Q4. This sounds interesting but can it save some tax for me?
Answer: This is one big area of concern for investors. The answer is that a SIP in an Equity Linked Savings Scheme (ELSS) can save tax for you if the following conditions are satisfied:
a. The ELSS fund is approved by the Government of India.
b. The investor has a PAN card and has filled out details on KYC form.
It is important to note that the deduction is made for the amount invested in ELSS through SIP. The said deduction is available u/s 80C and to a maximum of Rs 100,000.
Q5. Wait, what are ELSS funds?
Answer: Simply put, an ELSS is a fund that puts your money into equity markets. Also, while you get the tax benefit on these funds, the benefit of upside in the markets is also obtained. For a list of well-performing ELSS funds, do check this link.
This may sound quite complex and hence, I have kept the topic of ELSS at bay for now. In the course of next few days, I will come out with a separate article on ELSS funds and their taxability.
Q6. So, can we once go over the benefits of SIP?
Answer: Yes, definitely. The benefits of a SIP style of investing are:
a. It helps you to use the power of compounding. To know about it, check this short PPT.
b. It gives you the advantage of rupee cost averaging. Though the term sounds complex, it simply means that by investing at regular intervals, your returns from the markets are stable.
c. Develops the habit of saving money and if you have an ECS then better!
Well, this is pretty much all about Systematic Investment Plans (SIP) . There is a possibility that you might face a difficulty in understanding some of the terms mentioned here. If that’s the case then please send over any queries/suggestions to firstname.lastname@example.org OR use the comments section.