Mutual Funds / SIP

A mutual fund is a trust that collects money from investors sharing common investment objectives and then invests the money in securities such as stocks, bonds, assets and different money market instruments.

Why Must You Boost Your SIP Every Year ?

We know that SIP allows you the flexibility to select investment amount and tenure per your convenience. But many of us commit to it once and then forget to nurture it to grow even more.

SIP is a favoured way to invest in mutual funds, especially the salaried and middle-class who can afford only a fixed small amount. But there are instances when the salary grows, and then you can boost your SIP amount.

What does it mean by boosting SIP?

Boosting simply means increasing the amount of monthly contribution towards the mutual fund corpus.

SIP allows you to start investing with a minimum amount of Rs 500, but to accumulate a substantial amount of wealth in the long run, you must increase your contribution towards it. Suppose you were investing Rs 1000 for three years. But due to your performance, you get a hike of 25 percent. In this scenario, you can spend the excess amount. But more prudent would be to boost existing SIP by committing the extra amount to SIP.

There are significant benefits of stepping up your SIP amount. Here we have enumerated them below.

Boost growth in your corpus

SIP mutual funds work on the principle of compounding interest or compounding growth. It implies that return is calculated based on the previous principal amount and past accumulated interest.

So, when investors increase the principal amount, it boosts the interest income and the new principal. The result is a substantial rise in returns.

For example, an investment of Rs 10000 earns Rs 2,01,457 at the rate of 10 percent after ten years. Everything remaining the same, Rs 1200, will garner a return of Rs 2,41,748. So you can see that by increasing your investment by Rs 200 monthly, you can boost your returns substantially.

Protect yourself against inflation

Inflation is a situation of declining purchasing power of money. As time passes, the value of your savings gradually decreases. The best way to hedge against investment is to increase your investment.

Traditional savings plans do not offer a hedge against inflation. But by boosting your SIP, which grows at a compounding rate, you can create a cushion for your future expenses.

Reach your goal faster

The ultimate benefit of boosting the principal amount is that it helps you reach your financial goals faster. If you are investing with a plan to buy property, children’s education, or retirement, boosting your investment is the easiest way. Investors investing online have the option to increase their monthly contribution quickly, and with compounding, you can reach your planned goals faster than usual. By increasing the monthly SIP by Rs 200, you can receive Rs 10000 more in just three years.

How to boost your SIP

You can increase your contribution either by a fixed percentage or a fixed amount. However, you must set an upper limit so that the hike doesn’t exceed your budget. You can select a new scheme or top-up the existing one.

The best time to top-up SIP is during appraisal when your monthly income increases. You can increase your investment in the line of your income and expenses without troubling your current lifestyle. If you have received a bonus, you can temporarily park the additional corpus in a liquid fund and introduce a systematic transfer plan (STP) to transfer it to an equity fund.

However, you can increase your investment anytime. The objective is to achieve your financial goal faster, so avoid aligning the boosted SIP to a new purpose.

Remember that investing in any SIP plan alone won’t help in achieving your goal. Before selecting a scheme, do your research and choose the one that aligns with your goals and convenience. Flexibility is one of the several benefits of SIP. Hence, boost your SIP yearly to exploit the full potential of compounding.

Differences Between SIP And Mutual Funds

We almost use SIP and mutual funds investment synonymously. But SIP is not the only method to invest in mutual funds. In this article, we will discuss the differences between SIP and lump sum investment and evaluate each.

Mutual funds are a simple way to invest in the stock market. Fund managers create a pool of funds from different investors and invest the corpus to the common financial goals of its participants. Before investing, they research each stock, analyse company fundamentals, performance, stock price trends, and prospects. Based on research, they invest in the most suitable options.

Investors, especially new investors, can invest easily through mutual funds. They don’t need to worry about their money being invested in the market as it is backed by a team of analysts and fund managers. Professional fund management helps reducing market risk.

Mutual funds reduce market risk through a diversified portfolio by investing the corpus into different asset classes and horizons. With reduced risk, the loss incurred on one asset class gets offset by the profit earned on another. Often investors don’t have the expertise and means to create a highly diversified portfolio that optimises returns. Mutual funds offer instant diversification beyond the capacity of an average investor. Further, the fund managers constantly track the fund’s performance and make the right investment decision according to market movement.

Since mutual fund investment offers so many benefits, investors constantly search for the best way to put their money in mutual funds. Let’s now see the difference between SIP and mutual funds to understand which is a better method.

To begin with, SIP is not a separate product. It is one of the methods of investing in mutual funds.

What Is SIP?

SIP or systematic investment plan is a way to invest in mutual funds. It is a process through which you invest a fixed amount regularly over a period of time.

Contrary to stock investment, where you need to time the market. SIP makes it easier for investors by setting up an investment plan through all market conditions and helps them benefit from rupee cost averaging. SIP gives the flexibility to select any amount and frequencies to invest in the market. It makes you disciplined by letting you invest in instalments while keeping monthly income and expenses planned and in sync.

What is Investing In Lump Sum?

The opposite of SIP investment is lump sum investment, where investors initially invest the entire corpus. SIP and lump sum are the two ways of investing in mutual funds.

Investors with a significant amount of cash in hand looking to park their funds can invest in a lump sum. However, an investor with regular income can set up a SIP plan based on investment goals and horizon. SIP requires investors to make fixed monthly/quarterly instalments towards the investment scheme.

In lump sum investment, all units get allotted at the beginning of the investment depending on NAV value. Hence, you need to time the market and invest when NAV is low to get the maximum units allotted. But with SIP, you can invest under any condition and get units accumulated per market value.

Let’s understand with an example. Suppose you invest Rs 24,000 in the market. While investing in a lump sum, you will get units worth Rs 24,000 allotted when making the payment. Now for a SIP, the same amount gets spread over a year while you make payments of Rs 2000 per month. Each month you receive Rs 2000 worth of units to your portfolio depending on current market NAV. As a result, SIP allows you to accumulate more units over a period.

SIP And Mutual Funds: Differences At A Glance

Methods

Both are different methods of investing in mutual funds. SIP is a process of making fixed instalments to accumulate mutual fund units over the investment tenure. In lump sum payment, the units get allotted at the beginning of the investment period and remain unchanged.

Power Of Compounding

In SIP, investors invest in a disciplined way to accumulate wealth. It is considered a better route to achieve financial goals.

Mutual fund investors can reinvest their earnings which allow them to enjoy the power of compounding for the investment period. Reinvesting in the same plan helps accumulate more units and result in higher returns.

Flexibility

SIP allows you more flexibility with small regular instalments spread over the investment period. Hence, SIP suits salaried investors better, as it will enable them to invest without curtailing their current lifestyle.

Lump sum investment suits better when investors have a surplus fund which they need to invest in one go.

Benefit Of Cost Averaging

Investors enjoy the benefits of rupee cost averaging with SIP investment.

Rupee cost averaging is an approach where you invest fixed payment toward a mutual funds scheme. It allows you to receive more units when the market is low and fewer units when the NAV value is high. This way, you get maximum value for your investment in a volatile market when it lowers the overall cost of investing. It dismisses the need of monitoring the fund’s performance daily.

Lump sum doesn’t offer the benefit of rupee cost averaging, and the units get allotted at the beginning of the investment period.

Hedge Against Volatility

SIP eliminates the necessity for timing the market.

Investors, especially the new ones, are often uncertain about the right time to enter the market. However, with lump sum investment, there is always a need to find the right time to invest to receive the maximum number of units.

On the other hand, SIP spreads investment over a period and reduces uncertainties arising from market volatility. It allows rupee cost averaging, an approach to receive more units while the market is low and less during an uptrend.

Differences In A Table

Parameters

SIP

Lump sum

Method

Regular payments over a period

One time investment

Flexibility

High. SIP lets you select the frequency of investment and investment amount

Low

Cost

The overall cost is less because of rupee cost averaging

The cost is usually high because of one-time investment

Volatility

Less affected by market volatility

Needs investors to time the market correctly as market trend affects the number of total units allotted

Concluding Thoughts

SIP and mutual funds investment are simply the two ways of investing, each with a set of pros and cons. We hope that by the points discussed above, you now have a clear understanding of when SIP is better over lump sum investment and vice versa. However, in the end, SIP has some clear advantages over lump sum investment and lets investors start investing in any market condition.

Whether you select to invest through SIP or mutual funds, always choose a method according to your convenience, income, and investment goals.

Know the Mutual Fund Categories

Mutual funds are specifically designed for the community, as mentioned above. Multiple investors want to enjoy the joys of compounding by investing in financial markets but might not have the time or financial know-how to proceed with the same. Mutual funds pool money from various such investors and invest the collected corpus in different investment avenues based upon the fund’s overall objective. The fund managers manage the day-to-day functioning of the investments, making decisions upon the buying and selling of the investments depending upon the objectives of the funds.

Categories of Mutual Funds:

The SEBI guidelines on Categorization and Rationalization of schemes were issued in October 2017. According to that, the mutual fund schemes are classified below:

1. Equity Schemes:

These mutual fund categories primarily invest the pooled fund into equity and equity-related instruments. The objective of such schemes is to gain long-term capital appreciation through their investments. These funds are suitable for investors with a higher risk appetite and a longer-term investment horizon.

The categorization for the same can be based upon market capitalization: Large Cap Fund (80% of investment in large-cap stocks), Mid Cap Fund (65% investment in mid-cap stocks), Small Cap Fund (65% of investments in small-cap stocks). The funds can also be based upon a Multi-Cap Fund strategy wherein the fund managers can curate their funds based upon allocations in multiple market capitalization.

The categorization of funds can also be based upon the investment strategy. Growth funds invest predominantly in companies aggressively aiming to increase their sales and try to capture the maximum market capitalization possible. Value funds invest in stocks undervalued relative to their sector or the overall equity market. Dividend Yield funds invest predominantly in stocks that give out a significant amount of their earnings in the form of dividends. Investors with lesser risk appetite invest in such funds as the companies included in these funds generally have a proven track record and significant market leaders.

The funds can also be based upon a particular sector or a theme like metal, banks, or automobiles, to name a few. Such funds have 80% investments into their theme-based equity investments.

2. Debt Schemes:

These debt mutual funds invest in short and long-term securities issued by the government, companies, and public financial institutions in the form of Treasury Bills, Government Securities, Debentures, Commercial Paper, Certificates of Deposit, and many more debt instruments. These mutual fund categories primarily invest the pooled fund in bonds or other debt securities. Investors ideally prefer these debt funds for income generation and preservation of capital.

The duration of the debt instruments can categorize these funds. These debt instruments can have maturities as short as one day, which is classified as an Overnight Fund, to maturities ranging more than seven years as a Long Duration Fund. Liquid Fund invests in securities for a duration of up to 91 days only. Low Duration Fund invests in debt ranging from six months to twelve months. Likewise, money market, short, medium, and medium to long-duration funds invest in maturities up to one year, one to three years, three to four years, and four to seven years, respectively. Dynamic Bond Funds are diversified funds and invest in debt across durations.

These debt schemes can also be classified based on the fund management strategies or issuers of securities. Banking and PSU Funds invest a minimum of 80% in Debt instruments of banks, PSUs, Public Financial Institutions, and Municipal Bonds. The corporate bond funds only invest in AA+ and above-rated bonds, and a minimum of 80% of their investment corpus should be in AA+ and above bonds. Similarly, Credit Risk Funds invest a minimum of 65% in AA and below rated bonds. Lastly, Gilt Funds are funds that invest a minimum of 80% in G-secs across maturities.

3. Hybrid Schemes:

As the name suggests, the Hybrid funds invest in a mix of equity and debt securities. Investors who want their investments compounded coupled with a steady flow of income and capital preservation can invest in such funds.

The Hybrid Fund categories are based upon the allocation strategies. A Conservative Hybrid Fund will invest 10% to 25% in equities, with the balance being in debt. A Balanced Hybrid Fund will invest 40% to 60% in equity, with the balance being in debt.  Similarly, an Aggressive Hybrid Fund will be more inclined towards equities and will invest 65%-80% in equities with the balance being in debt.

These hybrid fund categories can also invest in multiple assets (minimum of three asset classes) with a minimum allocation of at least 10% in each class. Lastly, investors do have an option to invest in arbitrage funds too. These funds are focused upon arbitrage strategies, with a minimum of 65% investment in equity and equity-related instruments.

4. Solution-Oriented & Other Funds:

These mutual funds are set up with a particular purpose. The investments are made in a manner of the fulfillment of the objective. These are generally specific financial objectives that an investor wishes to achieve and through mutual funds. The retirement funds are based upon the retirement plans of an individual. These funds have a lock-in period of at least five years or till retirement age, whichever is earlier. Similarly, there is a Children’s fund set up entirely to fund a particular future expense of the child (marriage or education).

Investors can also passively invest in Index oriented mutual funds. These funds are purely a replication of the Index, and hence the investors who want to invest passively opt for this model. Investors also can opt to invest in Fund of Funds. These are mutual funds that directly buy units of various other mutual funds, and hence their portfolio is based upon the multiple mutual funds they would invest the pooled money in.

The selection of a mutual fund category depends on the investor and his / her underlying objective. Investors need to have clearly defined objectives. Based upon the motive to invest (capital appreciation or income generation), risk appetite (high or low), and duration (short-term or long-term), one can select a particular mutual fund or combination of various mutual funds to park their money in to achieve their financial goals.

What are Equity Mutual Funds? Know the Types and Benefits -

What are Equity Mutual Funds

Equity Funds are a type of mutual fund that focus on the equities markets. To better understand equity mutual funds, it is important to understand that mutual fund is an umbrella term for professionally managed funds that pool together investments from several investors and invest them in varied asset classes depending on the investors’ risk appetite. There are mutual funds that focus exclusively on real estate, while others might invest predominantly in commodities. Equity funds are mutual funds the majority of whose exposure is to the equities markets. As a result,  they are also called Growth Funds. The main objective of equity funds is the creation of wealth or capital appreciation. Equity funds manage risk by diversifying their portfolio into a relatively large number of stocks, allowing them to give better returns than traditional savings instruments such as FDs or post office savings deposits.

Types of Equity Funds

Equity funds can be categorized  into the following types:

Based on Investment Style

Based on Investment Strategy

Based on Market Capitalization

Based on Tax Treatment  

Features of an Equity Fund

Benefits of investing in Equity Mutual Funds

Investments in equity mutual funds have several benefits such as:

 

Taxation rules of Equity Mutual Funds

Equity mutual funds attract the following kinds of taxes:

Capital Gains Tax

If the holding period is less than 12 months, they are known as short-term capital gains which are taxed at 15%. If the holding period is more than 12 months, the gains are called long-term gains. Long-term gains above 1lakh are taxed at 10%.

Dividend Distribution Tax (DDT)

A dividend distribution tax of up to 10% is levied in case the mutual fund provides a dividend to its investors.

To Sum Up

Equity mutual funds are a great option for those who want to invest in the equities markets but do not have either the time or the expertise to research and pick good stocks, constantly track their portfolios, and monitor the market conditions. With professional fund managers and the several safety measures built in, equity mutual funds provide the high growth associated with equities at a relatively lower risk as compared to direct participation in stocks.
 

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