7 Things First-Time SIP Investors Should Know About!

Admit it! SIPs are the flavour of the season. They help investors accumulate mutual fund units by investing a small amount of money every month. In times of distress like COVID-19 or the Russia-Ukraine crises, suppressed NAVs of mutual fund schemes helped investors average their investments.
first time sip investors

Here are 7 things that first-time SIP investors should know about!

1 – Which Plan Are You Opting For?

Before setting up an SIP, a vital consideration is which plan are you opting for? Earlier, each mutual fund scheme only had a regular plan through which one could make investments. A standard plan includes agent commissions in the scheme’s total expense ratio. But in 2013, the SEBI came up with a regulation stating that each scheme needs to offer a direct plan for investment along with a regular one. The direct plan eliminates agents and their commissions.

So if you’re initiating an SIP in a mutual fund scheme through a regular plan, it will cost you more than a direct plan. Although the difference in costs may seem minute, it can create considerable differences in returns over the long term. 

2 – What Is the Purpose of Initiating an SIP?

Before starting an SIP, an investor needs to decide the purpose. Merely investing in mutual funds through the SIP mode without a proper plan and just because you have idle cash does not make sense.

If you start an SIP to reach a particular goal, say education, travel, or marriage, it helps to stay on course, even during tough times. Also, if a goal is tied to a particular SIP, it forces an investor to pause and think before redeeming or stopping the SIP during times of distress. 

3 – How Are SIP Returns Taxed?

Saving on taxes is an integral part of financial planning. Here, one needs to know which period is considered long-term and short-term concerning both equity and debt mutual fund schemes. 

4 – Difference Between an SIP and a Mutual Fund

Before starting an SIP, you need to have a clear distinction between an SIP and a mutual fund.

A mutual fund is an investment avenue, whereas SIP is a mode of investment through which one can park money in mutual fund schemes.

5 – What Is the Lock-In Period for Your SIP?

Before you start an SIP in a particular mutual fund scheme, you ought to know if there is any lock-in period or exit load in the scheme.

A lock-in period is a pre-specified period after investing during which an investor cannot redeem his/her investments. Equity Linked Savings Scheme (ELSS), an investment avenue under Section 80C, has a lock-in period of three years from the date of investment. 

At the same time, exit load refers to a certain % of investment value that is charged by the mutual fund scheme if the investor redeems his/her investments before a pre-specified period. 

6 – Which Funds To Choose for Initiating an SIP?

Before starting an SIP, an investor should decide which fund to choose to start investing in! 

A young, aggressive investor can initiate SIPs in equity mutual funds in the smallcap and midcap categories as they have long investment tenure. Whereas a conservative investor in his/her forty’s may opt for a mix of equity and debt funds, known as hybrid funds. Although there is no thumb rule, investors should decide which funds to invest in, considering their ability and willingness to take risks.

7 – How To Change the SIP Amount?

Although decreasing the SIP amount should be avoided at all costs, if one wants to increase or decrease his/her SIP amount in the future, he/she should know the process of altering the SIP amount.

In most cases, doing so is a complicated task. As an alternative, one can stop the existing SIP and start a new one with a changed amount.

As an SIP investor and to avoid any surprises at a later stage, knowing these seven critical things is a must!

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