You can pause, top-up and insure your monthly investments
The plain-vanilla SIP (systematic investment plan), which allows you to park a specific amount periodically in mutual funds, comes with added benefits and variants. Here are a few other things you can do with your regular SIPs.
Pause instalments
The economic sluggishness caused by the COVID-19 pandemic has resulted in job losses and pay cuts. The immediate reaction of many investors after such an event is to cancel their SIPs. Instead of doing so, you can pause your investments for a few months, till such time as your financial situation improves. “Investors can avail the SIP Pause facility by sending an email to the AMC, mentioning the folio number,” says Chintan Haria, Head Product Development & Strategy, ICICI Prudential AMC.
You can review your ‘pause’ decision later.
Top-up amounts
If you have a surplus and want to invest more when the markets are at low levels, you can top-up your SIP with additional sums. You don’t need to start a fresh SIP. This helps raise your investments in line with the rise in your income. Fund houses such as ICICI Prudential, Mirae, Axis and SBI offer this facility.
If you invest Rs 10000 in an equity fund, then at the end of seven years you will end up accumulating Rs 12.88 lakh, if the scheme delivers 12 per cent annually. However, if you raise your contribution by Rs 1000 a month at the end of each year, then you will take home Rs 16.16 lakh.
Insuring contributions
Fund houses such as ICICI, Aditya Birla Sun Life, PGIM, Nippon and Axis offer insurance cover to investors. The investor need not spend any additional amounts for the insurance cover. The cover is linked to the SIP amount. The insurance amount depends on the monthly sum and time horizon of the SIP.
“Availability of insurance cannot be the sole factor to sign up for an SIP,” says Harshad Chetanwala, Certified Financial Planner and co-founder of MyWealthGrowth. The scheme’s mandate, risk profile and suitability for your goal are key considerations.
Each SIP carries a separate exit load
Each SIP instalment is treated as a fresh investment. For example, in an equity linked savings scheme (ELSS), each investment needs to complete the three-year lock-in. When the units allotted to you in the first SIP instalment complete three years, you can sell them.
Exit loads are charged on mutual fund schemes for selling units early. So, if a scheme charges 0.5 per cent if you exit before six months, then each SIP instalment is subject to this rule.
Understanding the tax treatment
There is long-term capital gains (LTCG) tax to be paid. Long-term is defined as one year for equity funds and three years for debt, gold, international schemes. Each SIP needs to complete this threshold. If some units of an equity fund are sold before completing one year, then your gains are taxed at 15 per cent. Gains from units held for more than one year are taxed at 10 per cent.
