Which is better mutual fund investment option? or systematic investment plan, is a popular way of investing in mutual funds where you invest a fixed amount at regular intervals, such as daily, weekly, or monthly. SIPs help you build a habit of saving and investing and also benefit from the power of compounding and rupee cost averaging. But which SIP frequency is the best for you? How does it affect your returns and taxation?
Which is better mutual fund investment option? And what is the SIP frequency?
SIP frequency is the time interval at which you invest in a mutual fund scheme through SIP. You can choose from various options, such as daily, weekly, fortnightly, monthly, quarterly, half-yearly, or yearly. The most common SIP frequency is monthly, where you invest once every month, usually on a fixed date. However, some investors may prefer other frequencies, such as daily or weekly, depending on their cash flow and goals.
How does SIP frequency affect your returns?
Theoretically, the more frequently you invest, the more you can benefit from rupee cost averaging, which means you buy more units when the market is low and fewer units when the market is high. This reduces your average cost per unit and enhances your returns in the long run. However, in practice, the difference in returns between different SIP frequencies is not very significant, as the market movements are unpredictable and random. For example, a study by Value Research showed that the difference in returns between daily and monthly SIPs in the same fund over a 10-year period was less than 0.5%.
Therefore, experts suggest that instead of focusing on SIP frequency, you should focus on choosing the right fund, investing for the long term, and increasing your SIP amount periodically. These factors have a bigger impact on your returns than SIP frequency.
How does SIP frequency affect your taxation?
The taxation of SIPs depends on the type of mutual fund you invest in and the holding period of your units. Equity mutual funds are taxed at 10% for long-term capital gains (LTCG) above Rs 1 lakh and 15% for short-term capital gains (STCG). Debt mutual funds are taxed at 20% with indexation for LTCG and as per your income tax slab for STCG. The holding period for equity funds is 12 months, and for debt funds, 36 months, to qualify as LTCG.
The SIP frequency affects your taxation because each SIP installment is considered a separate investment, and the holding period is calculated from the date of each installment. This means that if you invest in a monthly SIP, you will have some units that are long-term and some that are short-term, depending on when you redeem them. However, if you invest in a daily or weekly SIP, you will have more units that are short-term, as you will have to wait longer for them to become long-term. This can increase your tax liability, especially for debt funds, where the difference in tax rates between LTCG and STCG is higher.
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Therefore, experts advise that you should choose your SIP frequency based on your cash flow and convenience, but also keep in mind the tax implications. You should also try to hold your units for the long term and avoid frequent redemptions to minimize your tax outgo.
Which are the best mutual funds for SIP?
The best mutual funds for SIP are the ones that suit your risk profile, investment horizon, and financial goals. There isn’t a universal solution, as various investors may harbor distinct preferences and expectations. However, some general criteria that you can use to select the best mutual funds for SIP are: Consistent performance: You should look for funds that have delivered consistent returns over different time periods and have beaten their benchmark and category average. You should also compare the risk-adjusted returns, which measure how much return the fund has generated per unit of risk taken.
Low expense ratio: You should opt for funds that have a low expense ratio, which is the annual fee charged by the fund house for managing your money. A lower expense ratio means a higher net return for you.
Fund manager’s track record: You should check the fund manager’s experience, qualifications, and track record and see how he or she has managed the fund through various market cycles. You should also check if the fund manager has any exposure to the fund, which indicates his or her confidence and alignment with the investors.
Fund size and liquidity: You should choose funds that have sufficient size and liquidity, which means they can easily buy and sell securities without affecting the market price. A very small or very large fund may face challenges in managing the portfolio and meeting the redemption requests.
Some examples of mutual funds that have performed well in the past and have a good reputation are: Axis Bluechip Fund: This is a large-cap equity fund that invests in the top 100 companies in India, with a focus on quality, growth, and stability. The fund has given an annualized return of 18.24% in the last 10 years and has a low expense ratio of 0.51%.
Mirae Asset Emerging Bluechip Fund: This is a large and mid-cap equity fund that invests in emerging companies that have the potential to become future leaders. The fund has given an annualized return of 23.97% in the last 10 years and has a low expense ratio of 0.77%.
Parag Parikh Flexi Cap Fund: This is a flexi-cap equity fund that invests across market capitalizations, sectors, and geographies, with a value-oriented and contrarian approach. The fund has given an annualized return of 21.45% in the last 10 years and has a low expense ratio of 0.89%.
ICICI Prudential Balanced Advantage Fund: This is a hybrid fund that invests in a mix of equity and debt with a dynamic asset allocation strategy that adjusts the equity exposure based on the market valuation. The fund has given an annualized return of 11.92% in the last 10 years and has a low expense ratio of 1.31%.
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HDFC Corporate Bond Fund: This is a debt fund that invests in high-quality corporate bonds with a focus on safety and liquidity. The fund has given an annualized return of 8.72% in the last 10 years and has a low expense ratio of 0.44%.
What is the minimum amount required for SIP?
The minimum amount required for an SIP may vary depending on the mutual fund scheme you choose. Typically, the minimum amount can range from as low as Rs 100 to Rs 500 per month. However, some schemes may have higher minimum amounts, such as Rs 1000 or Rs 5000 per month. You should check the scheme details before investing in an SIP. You can also use the SIP calculator to estimate the amount you need to invest to achieve your financial goals.
What is the maximum amount I can invest in an SIP?
What is the difference between an SIP and a lump-sum investment?
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SIP benefits from rupee cost averaging, which means you buy more units when the market is low and fewer units when the market is high. Lump-sum investment does not have this benefit, as you buy units at a fixed price.
SIP allows you to start investing with a small amount, as low as Rs 100 per month. Lump sum investment requires a large amount, typically starting from Rs 1,000 or more.
SIP leverages the power of compounding as you reinvest the returns over a long period of time. Lump sum investments may not have the same compounding effect as long as the principal amount remains the same.
SIP helps you build financial discipline as you invest regularly and systematically. Lump-sum investments may not have the same discipline as when you invest once and do not follow up.
Conclusion
SIP is a smart and convenient way of investing in mutual funds that can help you achieve your financial goals with discipline and patience. However, you should not get too obsessed with the SIP frequency, as it does not make a big difference in your returns or taxation. Instead, you should focus on choosing the right fund, investing for the long term, and increasing your SIP amount periodically. You should also consult a financial advisor or planner who can help you design a customized SIP portfolio that suits your needs and preferences.
