FAQ’s about Systematic Investment Plans or SIP

I got a very interesting question about systematic investment plan or SIP and it was

Market is quite high currently but can I start SIP now or should I wait for the dip in the market to getting started with SIP.

And I am sure this is a question of many and so let me not only answer this question but also some of the frequently asked questions which I found are being asked very often in most of forums online.

Q1. Can I start a SIP when market is at all time high?

A1. The idea of SIP is to avoid timing the market and should be started at any given state of the market. Be it very high or very low. The purpose of SIP is to avoid timing the markets and get into the habit of investing with a purpose.

Q2. In which mutual funds can I start a SIP?

A2. Mutual funds are not categorized to be accepting any particular type of investment like SIP or lumpsum investments. All mutual funds accepts both the option of investment i.e. you can start a SIP or do a lumpsum investment or even both at the same time. So if you want to be doing a SIP of 1k and a lumpsum investment of 10k, you can do it in the same fund on the same day. If you have an ongoing SIP in any fund and want to be adding some more amount as lumpsum amount, you can do that. If you have an existing SIP and want to be doing a second SIP in the same fund, you can do that too.

Q3. What happens if I miss a SIP?

A3. The short answer is nothing. Many investors tend to think that if a SIP is missed for any reason, the SIP account will be de-activated or they will have a bad CIBIL score for missing a SIP in mutual funds. Even if you miss a SIP due to insufficient balance in your bank account, it will neither have any impact on your CIBIL score nor on your SIP. You can just miss the SIP and it will be all ok when the time for next SIP comes, your SIP will continue as normal.

It also means that if you want to be starting SIP, you don’t need to think too much about future payments. You can just SIP for some months and if there is some financial crisis for you, you are fine missing few SIP’s and then continue once you have the needed funds.

Q4. Is there any upper limit to the SIP amount?

A4. No. There is a misconception about SIP that it is for smaller investment amount but that is not the case. There is no upper limit to the SIP amount  and you can SIP for as much investment amount as you want.

Q5. SIP Investment through Brokers is costly?

A5. No. If your broker does not charge for investing in mutual funds then SIP and lumpsum investment both should be free to invest. If your broker charges money for mutual fund investment like ICICIDirect does, both SIP and lumpsum investment will cost you money. Better to switch to brokers where it’s free to invest in mutual funds like ShareKhan or ZeroDha.

Another alternative is not to use your brokers to invest in mutual funds but to sign up with FundsIndia. They don’t charge anything for investing in mutual funds and provide pretty good options in an online account to invest in most of the mutual funds.

Q6. How to extend SIP duration?

A6. At the end of your SIP completion, AMC’s sends renewal form, which can be filled up and send it back, to extend your SIP investment. If you don’t want to be waiting for the completion of your SIP then you can just fill the SIP form with your existing folio number, and the new time period and send the form to extend the SIP period.

Q7. How to shorten SIP Duration?

A7. If you have online access to SIP, you can cancel the SIP with just few clicks but if you don’t have online access, you need to either send in a written and signed application to the AMC few days (Varies for different fund houses) before your next SIP date. Just remember that you can stop a SIP only if you have completed minimum investment period, which is 6 months for most of the funds. To avoid shortening of duration of SIP is to start a SIP for 6 months to a year and then add more time as you judge the performance.

Q8. When Can I withdraw my SIP amount when invested with a locking period or ELSS?

Every invested penny in a tax saving mutual fund (or any other locking period) needs to complete 3 years (locked in period) to be eligible for redemption. The easiest way is to consider each SIP as a one-time investment at a regular interval. So, each SIP in an ELSS fund will be locked in period for 3 years from date of purchase.

• If you started your SIP today i.e. 11th May 2014 with a locking period of 3 years then you can only withdraw that many units that you purchased with your first investment on 11th May 2017.
• The units allocated with second SIP investment on 11th June 2014 will be available for withdrawal on 11th June 2014.
• and so on and so forth.

Q9. How is Exit Load calculated on SIP investment?

A9. The calculation for exit load is exactly the same that I have explained for the locking period in the above question. Fund houses uses FIFO or first in first out method for calculating the exit load.

If you started a SIP on 1st October 2013 for 6 months and your SIP ended in March 2014 and assuming you don’t have any locking period. If you plan to redeem your investment on May 11th 2014 then, any units allocated before November 11th 2013 (6 months from now assuming 6 months is the time period for no exit load) will not have any exit load but units purchased between December to March will incur exit load.

If you plan to redeem only part of your investment in May 2014, then units purchased first will be redeemed first. So units purchased on 1st October and 1st November will be redeemed first. If your redemption request is for units lower than those purchased in October and November, you will have no exit load but if you redeem more units than what is purchased in October and November, you may incur exit loads on rest of the excessive units redeemed.