Maximize Your Mutual Fund Returns: Unpacking Your Most Pressing SIP Questions

Decoding Your SIP Queries: Expert Answers to Your Top Mutual Fund Questions

Investing in mutual funds through Systematic Investment Plans (SIPs) is a popular and effective way to grow wealth. But with so many options and strategies, it's easy to feel overwhelmed. To help clear the confusion, we've compiled answers to some of the most common SIP questions we received during our recent training session:

Should I continue with my completed ELSS SIP or start a Systematic Withdrawal Plan (SWP)? Should I invest more, and in which fund can I aim for 15% returns? +

This is several questions rolled into one! First, congrats on completing your ELSS SIP - that's a great achievement. Whether to continue or SWP depends on your financial goals and time horizon. Since you are a working professional, continuing your SIP in ELSS is beneficial as long as the Section 80C tax benefit is available. Even if the tax benefit is removed, equity investments are generally good for working professionals. If you need regular income, an SWP can be a good option.

For aiming for 15% returns, remember that past performance isn't guaranteed. Aim for realistic, long-term growth. Decide on schemes aligned with your risk tolerance. High-growth equity funds or mid-cap funds can potentially offer higher returns but come with higher risks.

Apart from SIPs, can I make a one-time investment in mutual funds? +

Absolutely! While SIPs are great for disciplined investing, you can also make lump-sum investments in mutual funds whenever you have a larger sum available. This can be beneficial if you have a windfall or a large amount of savings. However, remember that lump-sum investments are more exposed to market volatility compared to SIPs.

Here is a table comparing lump-sum vs. SIP, which is part of my upcoming SIP book given here in advance for your perusal. We will inform you when it is released on Amazon, where you can get more in-depth views about SIPs.

Feature SIP Lump Sum
Investment Frequency Regular intervals (e.g., monthly) One-time investment
Investment Amount Fixed amount per interval Large amount invested at once
Market Volatility Reduces risk through rupee cost averaging More exposed to market fluctuations
Disciplined Investing Promotes regular saving and investing Requires self-discipline to invest regularly
Accessibility Low minimum investment Might require a significant initial investment
How do I start investing in equities through SIPs? I'm a retired Bank Official. +

Congratulations on your retirement! Starting is easy. Usually, SIPs (Systematic Investment Plans) are not recommended for retired persons. Most retired individuals aim to consume or reap the benefits of their investments through SWPs (Systematic Withdrawal Plans). However, there are two scenarios where SIPs might be suitable:

Scenario 1: Surplus Income If you have surplus income based on your current financial situation and wish to leave it for your dependents later, the excess amount can be invested in SIPs. This may be useful if sudden additional expenses arise or if you want to pass on the investments to your dependents.

Scenario 2: Insufficient Income If you are finding it difficult to manage with your current income sources, consider the following:

Lump Sum Investment: If you have a sufficient lump sum, invest in Balanced Advantage Funds and allow it to grow. You can then withdraw amounts to match your insufficient income flow.

Bank Deposits: If you have bank deposits, consider moving them to Balanced Advantage Funds (BAF). Understand the risks involved and aim to get better returns from mutual funds compared to bank deposits.

Key Points to Consider:

  • Risk Assessment: Always understand the risks associated with any investment before making a decision.
  • Financial Goals: Ensure that your investment strategy aligns with your financial goals and risk tolerance.

First, identify your risk appetite and investment goals. You can choose funds based on your research or we can help with this requirement. Equity funds can provide higher returns but come with higher risks. Consider diversifying your portfolio with a mix of equity and debt funds.

Can you explain SIP in simple terms? +

SIP is like setting up an automatic savings plan for mutual funds. You choose a fund and decide how much you want to invest at regular intervals (monthly, quarterly). This disciplined approach helps average out your investment cost and ride out market fluctuations. It's a great way to build wealth over time without worrying about market timing.

Investing through Systematic Investment Plans (SIPs) is like carefully building a nest—each small, regular investment contributes to a solid financial foundation. Central to SIPs is the principle of Rupee Cost Averaging (RCA), a strategy designed to minimize the impact of market volatility by spreading investments over time. This approach is similar to making monthly payments on a smartphone or a housing loan, rather than a large one-time expense.

What are LTCG and STCG in relation to SIPs? +

LTCG (Long-Term Capital Gains) and STCG (Short-Term Capital Gains) refer to the taxes you pay on profits from your mutual fund investments. For equity funds, gains are considered long-term if the investment is held for more than one year, and the tax rate is 12.5% on gains exceeding Rs 1.25 lakh in a financial year. Short-term gains are taxed at 20%.

For debt funds, the holding period for long-term gains is two years, and the tax rate is 12.5% without indexation benefits. Understanding these tax implications is crucial for effective financial planning.

Here is a table comparing short-term vs. long-term capital gains, which is part of my upcoming SIP book given here in advance for your perusal. We will inform you when it is released on Amazon, where you can get more in-depth views about SIPs. This book has details about First In First out principles related to SIP taxation.

Category Before Budget 2024 After Budget 2024
Equity Mutual Funds (>65% in equity)
Short-Term Capital Gains (STCG) 15% 20%
Long-Term Capital Gains (LTCG) 10% 12.50%
LTCG Exemption Limit Rs 1 lakh Rs 1.25 lakh
Debt Mutual Funds (>65% in Debt)
Short-Term Capital Gains (STCG) Marginal tax rate Marginal tax rate
Long-Term Capital Gains (LTCG) 20% with indexation 12.5% without indexation
Long-Term Definition 3 years 2 years
Other Funds (Gold ETFs, FOFs, International Funds)
Short-Term Marginal tax rate Marginal tax rate
Long-Term 20% with indexation 12.5% without indexation
Long-Term Definition 3 years 2 years

Key Changes:

  • Increased STCG and LTCG rates for equity funds
  • Higher LTCG exemption limit
  • Simplified taxation for gold ETFs, FOFs, and international funds
  • Removal of indexation benefits
  • Elimination of TDS on mutual fund redemptions, particularly for NRI investments
How do I check which fund is good and how much risk is involved? Will that fund give the same return in the future just because they have given in the past? +

To check which mutual fund is good, look at its past performance, expense ratio, and the fund manager's track record. However, past performance is not indicative of future returns. The risk involved can be gauged by looking at the fund's standard deviation, beta, and Sharpe ratio. It's essential to understand that no fund can guarantee the same returns in the future as it has in the past. Always diversify your portfolio to mitigate risks.

Answering the second question - Will that fund give the same return in the future just because they have given in the past?

There is no guarantee that the fund will give similar returns as in the past. It is only an indication that the fund manager is doing a good job and the fund policy framework is good under these conditions. Hopefully, it will do well.

Conclusion

Investing through SIPs is a great way to build wealth over time without worrying about market timing. For more detailed information, you can read our Part 4 ETF blog, which provides comprehensive insights into ETFs and their advantages.