Updated on: Thursday, May 30, 2019, 12:41 AM IST

Know these 5 things before investing in mutual funds via SIP


Mutual funds today are everywhere, be it on TV, newspaper or various places on the internet. There is a good chance that every time you hear about mutual funds, it is followed by a powerful three-lettered abbreviation, SIP, “S – Systematic, I – Investment, P – Plan”.

SIP is simply a directive given to the fund house, to periodically invest in a scheme by deducting money from your bank account. For instance, if you start a SIP with fund house and decide to invest Rs 5000 on the 1st of every month, you are authorising that fund house to deduct Rs 5000 every month from your bank account to invest in the SIP scheme with the price (NAV) applicable as of 1st of that month.

Most of the times we don’t bother to think about things that matter over the long term, like investments and retirement planning. SIP investment basically takes care of this human inertia. That’s right. So, if you are planning to make SIP investment, it is essential to know some vital things before investing. Here are some points to consider:

  1. Know the Companies in which the SIP Invests

Every systematic investment plan invests its funds into a group of companies from different sectors. So, as an investor, you must check the profile of the companies picked by the fund house. Understand their performance over the past few years along with considering any news related to the firms, their financials, and future prospects.

  1. Understand your Risk Appetite

When you are sure about your financial goal, you must also be confident about the level of risk you are ready to take to achieve that goal. An investor can be either a conservative, moderate or an aggressive investor. Know which type of investor you are before investing in mutual funds via SIP.

If you are a conservative investor, investing in large-cap funds can be your ideal choice. Such funds mostly include big companies that are considered safe to invest because they are likely to be well-established players in their respective filed. If you are a moderate investor, then large cap and multi-cap schemes (also known as diversified equity) are the best options for you.

For aggressive investors, midcap and small-cap schemes, which are commonly known as high returns-high risks schemes, are the best choice.

  1. Know the Fund House

A fund house is the heart of your SIP investing experience and performance of the scheme. When you invest in a scheme, you are primarily giving it the mandate to manage the money on our behalf. Hence, selecting the right fund house is essential as various fund houses are specialising in different asset classes and their scheme performance differs significantly.

Your fund selection process must focus on management quality, experience and investment philosophy. Understand their investment processes, risk measures and operational efficiency. You can get a good idea of fund house by visiting their websites, reading basic details in scheme documents or accessing online research reports.

  1. Understand the SIP Instalment Lock-in Period

In case of a SIP in ELSS mutual funds, very often a delusion exists that, the entire investment can be withdrawn once the lock-in period of 3 years is over. But that’s not true!

The fact is that your every instalment of SIP must complete the lock-in tenure. So, let’s say if you put in Rs 5,000 through SIP in January 2018, the lock-in period for this one instalment will get over in January 2021. Similarly, other SIP instalments need to complete 3 years lock-in as well.

However, if you are investing in an open-ended mutual fund, there will be no lock-in period for your SIP as well.

  1. Understand the Tax impact on SIP Returns

The tax impact entirely depends on the type of mutual fund you invest in and when you redeem your investment.

For example, returns from equity mutual funds have no tax on them if redeemed after a year of investment. However, if redeemed before a year, you will have to pay a tax of 15% on your gains.

On the other hand, debt mutual funds, are subjected to 20% tax rate with indexation benefit if redeemed after 3 years since investment. But if you redeem before 3 years, the tax will be based on your income tax slab.

Also, if you use SIP to invest in tax saving ELSS mutual funds, you can claim tax deductions up to Rs 1.5 lakh under Section 80C of Income Tax Act.


Simply put, SIP investment is nothing but an automated mode of investment to avoid human inertia. To get better returns, you still need to research and periodically check the health of your portfolio.

In the end, investing in mutual funds via SIP is all about discipline and the time spent. Once, you have mastered these two, along with compounding, mutual funds can surely help you tide over any financial blues and reach your goals.

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Published on: Tuesday, January 23, 2018, 11:49 AM IST