This old article may have references to outdated tax rules and laws. For up-to-date information on taxation of mutual funds, refer to https://www.valueresearchonline.com/tax/
Face it! Saving often turns out to be a residual activity. One that takes place after you are done with your spending.
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Well, how about a new approach this time? Be as proactive in your saving as in your spending. No, we are not talking about the recurring bank fixed deposit or the mundane savings account.
Instead, we recommend investments made directly in mutual funds on a monthly or quarterly basis. Those funds that you are always meaning to invest in and never get around to doing. And when you do get around to making that investment, you hear of the markets being overvalued and are advised to wait for the inevitable correction.
This is where systematic investment plan (SIP) offers succor. SIP is a way to invest in funds and all funds offer this facility now. Through the SIP option you can invest at regular intervals – like monthly or quarterly. You can opt for the ECS mandate or issue post-dated cheques for investing through SIPs.
Often misunderstood as a strategy for the novice investor, it has more benefits than you can imagine. Apart from eliminating the problem of market timing, discipline and lack of time, they offer a means of compounding your earnings. By investing a fixed amount at predetermined intervals, the headache of figuring out the best time to invest is eliminated and this then offers an efficient way of riding the market volatility. It is also an effective way to avoid making that last minute dash to invest in your tax-saving funds at year end.
As regards the rationale of an SIP vis-a-vis a lump sum investment, valid arguments exist on the benefits of each. However, the argument is based on many ifs and buts of the prevalent market condition as are all investment decisions. Let us make it clear, if you are convinced that the markets can move only upwards and there is no chance of a downside from here, then you will do better by making a lump sum investment. But given the current volatile scenario, even a veteran investor will do well by incorporating an SIP in his portfolio.
With as little as Rs 500 required to run an SIP, you would do well to get your teenage child started on it. Let them witness the virtues of saving and investing from their own pocket money. It’s a lesson they probably will never forget.