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Frequently asked questions on systematic investment plans and their answers

How can someone with a fluctuating income invest through SIPs?

It depends on how fluctuating your income is. If the fluctuation is high – for instance, in one month you may make Rs 1 lakh and in the next three months you don't make anything – you should invest in a liquid or an ultra-short-duration fund and give a standing instruction to move that money over a period of time, say three to six months,into equity funds. If your fluctuating income has a minimum base, make lump-sum investments every month. Be disciplined about them. Whenever you have a surplus, invest it. In effect, this would be like an SIP.

How are SIPs taxed?

SIPs are taxed in a FIFO (first in first out) fashion. This means that if you redeem part of your investment made through SIPs, the earliest SIPs are redeemed first and the later SIPs are redeemed later. For instance, if you made 12 monthly SIP instalments during a year and then you redeem part of your investment, your initial SIPs (first, second and so forth) are redeemed first. This means that in order to qualify for long-term capital gains, each of your SIP in the invested corpus must complete at least one year. For equities, long-term gains (those made over one year) over Rs 1 lakh are taxed at 10 per cent and short-term gains are taxed at 15 per cent. 

Is it fine to step-up SIP contributions for a limited period?

The whole idea of SIPs is that you should be systematic with your investments. When you step up your SIPs for a limited period, this is not being systematic. You may actually end up investing more at a market high. If you have some extra money to invest, just spread it over a period of time. For instance, if you have received an annual bonus, spread it over six months. If you have got a sizeable amount on selling an asset, spread it over the next three years. How you deploy your windfall is determined by two factors: how crucial it is and how large the amount is.

Is it fine to continue an SIP in a small-cap fund when the stock market is at its peak?

Always invest through SIPs in small-cap funds.Never invest a lump sum. Small-cap funds are more volatile. But don't stop your SIPs and wait for correction. It is very difficult to catch the bottom and the peak. Even if you get lucky with the correction, it will be extremely difficult for you to get in again. So, continue with your SIPs. They will help you average out your buying price and will improve your returns over time. 

How come the equity funds I own have delivered meagre returns via SIPs in the last 5 and 10 years?

Poor SIP returns over 5 and 10 years are a sure sign that the equity funds you own are underperformers. While SIPs are a good tool to protect your portfolio against adverse market moves, SIPs cannot help you if you have selected poor funds. Now, the difference between top-rated funds and the bottom ones is easy to point out with the benefit of hindsight. Hardly anyone could have predicted exactly 10 years ago which set of funds would end up at the top of the rankings and which would scrape the bottom. But by regularly tracking your equity funds and replacing the ones which chronically underperform their benchmarks and category, you would be able to effect mid-way corrections in your portfolio.

My advisor tells me never to stop an SIP. Is that right?

SIPs can and should be stopped in three circumstances. One, you realise that you have chosen a wrong asset class or a wrong fund (for instance, a large-cap fund when you wanted the growth of a mid-cap fund) for your portfolio. Two, a fund that you are investing in is a chronic underperformer (versus its benchmark or category). Finally, stop your SIPs in an equity fund as you get closer to your financial goal. Many investors lose their motivation when the markets enter a bear phase. It is to discourage such self-defeating behaviour that advisors ask you to continue with your SIPs through ups and downs of the market.

I am a first-time investor and want to invest through SIPs. How do I go about doing so? Can I do SIPs online?

You can invest online directly through us.  As a new investor, there is a one-time documentation, called KYC (know your customer), which you will need to complete it while FREELY opening Online Mutual Fund account with us where your advisor can transact Purchase, SIP, redemption on your behalf. For more to know register here.

Is it possible to start an online SIP with auto debits from my bank account?

Yes, at PrudentFP, we provide this feature. In order to set up an auto-debit facility, register with us and choose the fund and provide the required details such as the amount and period of SIP. Keep your cancelled Cheque handy. You will get a registered your ACH mandate with your banker. Once your ACH mandate gets registered, your monthly SIP will get auto-debited from your bank account. In the future, if you wish to discontinue your SIP, just ask to us, we initiate to stop online immediate.

When I invested in SIPs, I was told they would protect against falling markets. But how is it that I am sitting on losses?

An SIP does not protect you against equity-market losses. All it does is that it makes sure that your investments in equity funds are well spread out over a period of time so that you don't catch a market peak. Now, SIP investments, too, will make losses if the market declines steadily after you begin your investments. But because SIPs help you invest in smaller instalments and spread them out over time, you get to average your investments at lower levels in the hope that when stock prices bounce back, those cheaper investments will pay off. If you take stock of your SIP returns over just one market phase, particularly a bear phase, the investment may show a loss.

I invested in some top-rated funds and their SIP returns are lower than lump-sum returns. Why is that so?

SIP investing is designed to max out your returns when you get off the starting block at a market high, keep investing through a decline and then see the markets recovering to scale new highs. It doesn't work well when the markets don't stick to this script.There are two types of market scenarios where an SIP investment will earn lower returns than a lump-sum investment. One is a steadily rising market. The other scenario is when markets behave like a bell curve: they rise first and then tank.

What if I choose a different date or split the SIP into weekly instalments instead of monthly ones? Will my SIPs do better?

There is no ideal date for an SIP. Changing your SIP dates would only work if the markets had a clear pattern that played out like clockwork every month. But we all know that market moves are a complete random walk. Splitting your SIPs into weekly instalments and trickling them into the fund in smaller doses doesn't have a big payoff. Your intention in taking the SIP route is to avoid worrying about timing. So pick any date and just stick to it.

Is a bear market the right phase to start an SIP in equity funds for the long term?

It is always the right time to start an SIP in equity mutual funds. Buying stocks when the market is low and selling them when the market goes up may sound like a great idea, but it is almost impossible to do so – at least on a regular basis. That is why investors shouldn't concern themselves with market movements beyond a point. They should start and go on with their investments irrespective of the market conditions.

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