We’re sure you know what a systematic investment plan or an SIP is by now. There has been a lot of talk about SIPs in the world of mutual fund investments. They have been heralded as the best way to invest in mutual funds, and not without reason. SIPs have numerous benefits that range from the psychological benefit of making investments an habit to the financial benefit of averaging your cost of acquisition.
Basically, what a systematic investment plan does is simplify mutual fund investments for you. You don’t have to worry about when to invest or where to invest. You start an SIP in a well-performing mutual fund and you’re set. An SIP is a simple way to invest, but it can get complicated if you begin to wonder about the different time periods of an SIP.
The default time period for an SIP is a month. Most investors have a monthly SIP running in their mutual funds. But an SIP can also be weekly, fortnightly or quarterly. Instead of investing once every month, you can also choose to invest every week, every 15 days or every three months. But the question is — should you? Why have SIPs traditionally been monthly and does changing the time period complicate your investments? We think so.
Before we get into the reasons, let’s look at the numbers first. Does a weekly, fortnightly or quarterly SIP beat a monthly SIP? Here are how the numbers stack up.
As you can see, there is only a marginal increase in the returns earned when the SIP is not monthly. And this is data for one specific time period. It may not be the same always. Essentially, SIPs of different time periods will deliver similar returns over a specific time period. Hence, in terms of returns there is no reason to not opt for a monthly SIP.
And the other reasons are also in favour of a monthly Systematic investment plan (SIP).
You start a systematic investment plan to achieve ease of investments. The simpler you keep your investments, the quicker you will be able to meet your investment goals.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.