Is SIP Safe or Not? The Ultimate Guide 

Investing in SIPs has been a hot topic of interest for those who want financial stability. And rightly so—it is a convenient and disciplined way to build wealth in a wise way. But is SIP safe? What are the factors that affect the returns and risks of SIPs?

This blog will answer all the important questions about SIP investment. Let’s uncover whether SIP is safe or not, along with its tax-saving perks and long-term potential.

What is SIP?

SIP, which stands for Systematic Investment Plan, is a prudent and disciplined investment avenue. It provides you with the opportunity to invest in mutual funds systematically.

With SIPs in your portfolio, you can build steady wealth while managing market fluctuations. This method allows you to contribute a fixed amount at regular intervals, promoting the habit of regular savings.

For example, you can start a SIP of  ₹1000/month in a mutual fund scheme. A fixed number of scheme units will be allotted to you monthly, depending on its prevailing net asset value (NAV). Over time, your investment will grow as the NAV of the scheme increases.

Is SIP Safe or Not?

With the rupee cost averaging feature, SIP can help you mitigate market volatility. By spreading your investments over time, you can buy more units when the market is down and fewer units when the market is up. 

It helps average out the cost of the investment over time and reduces the impact of market fluctuations. Here are some more features that ensure SIP is safe: 

• Automates your investment process. So, you don’t have to worry about timing the market or making lump sum investments.
• Helps you build a corpus for your future needs. Say hello to funds for retirement, children’s education, or buying a house.
• Invest in a diversified portfolio of mutual funds. This aspect reduces the risk of investing in a single asset class or stock.
• Enjoy flexibility! Start a Flexi SIP with a small investment amount and increase it according to your capacity.

Are SIP returns taxable?

Yes, SIP returns are subject to taxation based on the type of mutual fund and the holding period. Here’s a breakdown of SIP taxation:

• Equity Schemes: Short-term gains (held for < 1 year) are taxed at a flat rate of 15%. In contrast, for long-term gains (held for > 1 year), you’ll pay a 10% tax on profits over  ₹1 lakh without indexation.

For example, suppose you redeem an equity SIP investment after 14 months with a gain of  ₹1,50,000. In that case, ₹ 50,000 would be subject to LTCG tax at 10%.

• Debt Funds: If you redeem your investment within three years, the short-term gains are added to your income and taxed according to your income slab. If you wait more than three years, you’ll pay a 20% tax on profits after adjusting for inflation.

For example, if you invest in a debt mutual fund through SIP and redeem after 2.5 years, you could earn  ₹80,000. It will be added to your income and taxed as per your slab.

Can you stop SIP?

One of the standouts of SIP is the flexibility it offers. Depending on the fund, you can pause your SIPs online or offline for three to six months. Once the pause period expires, your SIPs will automatically resume.

But what to do if you don’t want to continue SIP and stop it? In that case, you can submit a request to the mutual fund company or the online platform where you started the SIP.

Important note: Remember to check the exit load or lock-in period (if any) before making any decisions.

Can the SIP amount be reduced/increased?

The SIP amount can not be reduced or increased directly. But you can still manage your investment amount effectively. Here’s how:

• Instead of putting in a large amount, opt for a smaller amount. Invest in a “Flexi-SIP” and buy more units when you have excess cash.
• Choose “top-up” or “step-up” SIPs. This way, you can increase your amount at specific intervals, like quarterly or annually.
• The best part to increase your investment – start a new SIP for the extra amount.

If you wish to reduce your SIP amount, cancel the current SIP and start a new one with a lower amount.

Can SIP save tax?

Certainly! But, for that, you must invest in tax-saving schemes, such as ELSS (Equity Linked Savings Scheme). These funds offer tax benefits under Section 80C of the Income Tax Act. 

You can claim a deduction of up to  ₹1.5 lakh per year for your ELSS funds. But they have a lock-in period of 3 years, which means you can only withdraw your investment after 3 years.

Can SIP be started online?

Yes, starting a SIP online has never been easier. Many financial institutions offer the convenience of initiating SIPs through intuitive online platforms. It provides a hassle-free and time-efficient process for investors to kick-start their investment journey. 

Does SIP have a lock-in period?

SIP itself does not have a lock-in period. Yet, the mutual fund scheme the SIP invests in may have a specific lock-in period. So, it’s crucial to be aware of the terms.

Does SIP have an exit load?

Some mutual funds may impose an exit load if you redeem your investment before a specified period. It is a fee the mutual fund company charges when you withdraw your investment before a specified period. 

Exit load is usually a percentage of the redemption amount and varies from scheme to scheme. So, review the fund’s exit load structure before making your decision.

Is SIP safe for long-term investment?

SIPs are tailor-made for long-term wealth creation. They help you enjoy the power of compounding and even out the ups and downs of the market. By doing so, SIPs offer a stable and practical option for the long haul.

Are SIP and Mutual Funds the Same Thing?

No, SIP and mutual funds are not synonymous. While SIP is an investment method, mutual funds are the products you can invest in through SIP. This strategy offers a diversified portfolio to suit your financial goals and risk appetite.

Bottom Line

SIP investments provide a safe and effective way to build wealth, save taxes, and achieve long-term financial goals. Remember, the key lies in making informed decisions and staying consistent with your strategy.