SIP Investment Process

SIP Investment Process

What is the minimum investment?

Each fund has their own minimum amount. Some may keep it at least Rs 500 per month; others may keep it as Rs 1,000.

How often does one have to invest?

It would depend on the individual.

The general perception is that SIP must be done every month. Other options of investing (i.e) once in three months or once in six months are also available.

Most fund houses provide the option of fixed dates, so you will have to choose one. Let's say you are presented with these dates: 1, 10, 20 or 30. You can pick any one date.

If you pick the 10th of the month, then on that day, the amount you have decided to invest in the fund has to be credited to your mutual fund.

How must the payment be made?

You can opt for the Electronic Clearance Service (ECS) from your bank; this means the mutual fund will, as per your instructions, debit a certain amount from your account every month.

Let's say you have a SIP of Rs 1,000 every month and you have opted to invest in it on the 10th of every month. Under this option, you can instruct your mutual fund to directly debit your bank account of Rs 1,000 on the due date.

If you don't have the required money in your account, then for that month, no units will be allocated to you. But, if this continues periodically, the mutual fund will discontinue the SIP. You need to check with each mutual fund what their parameters are.

Alternately, you can give post dated cheques upfront with your first investment.

Since these cheques are dated ahead of time, they cannot be processed till the date indicated.

How long I want the SIP?

You will have to state whether you want it for a year or two years, etc. If, during the course of this period, you realize you cannot continue with the SIP, all you have to do is inform the fund 15 days prior to the payout.

The SIP will be discontinued. You can continue to keep your money with the fund and withdraw it when you want.

Tax implications

Let's say you have invested in the SIP option of a diversified equity fund.

If you sell the units after a year of buying, you pay no capital gains tax. If you sell if before a year, you pay capital gains tax of 10%.

Let's say you invest through a SIP for 12 months: January to December 2005. Now, in February 2006, you want to sell some units.

Will you be charged capital gains tax?

The system of first-in, first-out applies here. So, the amount you invest in January 2005 and the units you bought with that money, will be regarded as the units you sell in February 2006.

For tax purposes, the units that you sell first will be considered as the first units bought.

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