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Mutual fund SIP & it’s lesser known facts

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Mutual fund SIP & it’s lesser known facts

A SIP or Systematic Investment Plan enables you to invest a fixed amount at regular intervals in mutual fund schemes, which in turn invest in the markets. It helps us build long term wealth with the benefit of power of compounding and rupee cost averaging. Here, an investor chooses an amount to be periodically invested in a chosen mutual fund for a given period of time. The frequency can be daily, monthly, yearly or quarterly, based on the convenience of the investor. Once a one-time bank mandate (OTM) is given by the investor while setting up the SIP, each month the same amount gets debited from the bank account of the investor on the chosen date, without having to worry about it. Hence, this is a safe, convenient and transparent process that investors can continue for a long time period, in order to attain a substantial financial corpus.

Having understood the basic concept of this form of mutual fund investment, let us dive into some lesser known facts about SIP or rather, myths investors have regarding SIP:

  1. You can withdraw funds without having to stop the SIP – You can withdraw from the accumulated balance anytime, in case of financial exigencies. In this case, AMCs follow a rule called ‘FIFO’ or First-in First-out, which means that the units which had been invested first, also get withdrawn first. It is to ensure that the investor does not have to pay short term capital gains taxes, as far as possible. 
  1. ‘Pausing’ of SIP – In case of a financial crunch or emergency, can choose to ‘pause’ your SIP investment, for a few months, till they have a usual cash flow again. For this, one has to fill up a form and resume the investments once possible. This window of pausing differs, depending on the AMC- typically a maximum window of 6 months is allowed to the investor. 
  1. Start investing with a small amount – It is a common myth that mutual fund SIP can be started only with a big amount. Contrary to this, the fact remains that an investor can begin monthly SIP with as little as Rs 500, and then have the option to increase it later with rise in income. So, students with pocket money can also start their SIP investments from an early age. 
  1. Is SIP is possible in debt funds – Investors think that SIP can be done only in equity mutual funds – but it is not true. You can make periodic investments in debt funds- such as low duration, liquid, ultra short duration funds as well. The choice purely depends on your risk profile as an investor and your financial goals. 
  1. Takes time to cancel the SIP – There are times when the investor cancels the SIP, but the instalment still gets debited from the bank account. This is because it typically takes 15 days to cancel the SIP. The bank, with which the SIP is registered would take some time to cancel the ongoing mandate and process the same. Hence, if the next SIP instalment date is first of the coming month, and investor SIP is cancelled on the 20th of the previous month, your next instalment would still go through.

In this read, we explored some common myths about mutual fund SIP and the aim was to bust them, so that investors can gain more knowledge on this hassle free investing, SIP mutual fund

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