The last few months have been testing times for equity SIPs. These SIPs have under-performed bank FDs due to the sharp correction post Jan-20. However, the volumes of SIP flows have hardly been impacted. Even in a month like April 2020 when the nation was under lockdown, equity SIPs received inflows to the tune of Rs8376cr; almost at par with recent months. Here are 7 things you must know about SIPs to make the best of them.
Yes, you can pause your instalments
The facility to pause SIPs temporarily became all the more important after the lockdown resulted in loss of jobs and pay cuts. SIPs could be stopped even before but the process took around a month. Post the COVID-19 pandemic, mutual funds are providing an online link on the website wherein MF investors can authenticate electronically and give instruction to halt SIPs for a certain period of time. Remember, SIPs are your platform for attaining long term goals. In times like these, it is best to temporarily pause SIPs than cancelling them.
You can step-up SIPs to align with income levels
A step-up SIP is also commonly referred to as a top-up SIP. You can make this top-up into a rule. For example, if you are currently running an SIP of Rs10,000 per month on SBI Equity Fund, you can give a step-up instruction to increase SIP by Rs2000 each year till the time the
SIP is in operation. This will ensure that your savings mandatorily increase with income levels. Such instructions to step up can be in rupee terms or percentage, although rupee step-ups are a lot simpler.
SIPs work best in falling markets
That sounds ironic but there is logic to it. When you run a SIP in a falling market, then each month you are getting more SIP units for the same monthly SIP investment. That helps in rupee cost averaging and reduces overall cost of the SIP. In a market that is vertically moving up, a lump sum investment in equity funds would work better. But SIPs are more practical as you can never predicts tops and bottoms in the market.
You can run SIPs on equity funds and debt funds too
The general perception is that SIPs can only be done with equity funds. That is not the case. As an investor you are free to do SIPs on equity funds or on debt funds. Of course, if your long term goal is to create wealth then SIPs on equity funds is more meaningful. Debt funds
tend to be relatively more stable. However, at times when gilt funds or bond funds show volatility, you can get the RCA benefits in debt fund SIPs too.
You can also get insurance with your SIP
Most investors are not exactly aware of this facility. But you can actually attach insurance to your SIP. Some of the fund houses like ICICI Pru and Aditya Birla with in-house insurance businesses offer this facility. Investors need not spend anything additional for the insurance
cover. It is linked to the SIP amount. It also ensures that in the event of untimely demise of the SIP holder, the SIP can continue to generate value to the family.
Each SIP is a separate transaction for exit load
Your SIP is not a consolidated investment but a series of investments over a period of time. Each SIP instalment is treated as a fresh investment. Exit loads are charged on mutual fund schemes for selling units early. So, if a scheme charges 0.5% exit load and you exit before six months, then each SIP instalment is subject to this rule. For example, if you sell equity SIP after 9 months, then the SIP contributions of the first 3 months will not attract exit load but the later 6 months will attract exit loads.
Tax treatment of SIPs is nuanced
For the purpose of tax treatment, SIPs are akin to exit loads. In the case of equity funds, STCG at 15% is applicable if held for less than 1 year and LTCG at 10% is applicable beyond 1 year. However, each SIP instalment will be a separate investment for STCG / LTCG
calculations. In the case of debt funds, STCG at peak rate is applicable if held for less than 3 years. There is LTCG to be paid at 20% with indexation benefits if held for more than 3 years.
There are some interesting things to remember about SIP taxation. Firstly, when you sell the SIP units, the capital gains are calculated using the FIFO (first in first out) method. Secondly, in the case of SIPs on tax saving funds (ELSS), the 3 year lock-in will be applicable on each
instalment for 3 years from the date of investment.