What is a Mutual Fund: Part 2
What is an SIP?
An SIP, or a systematic investment plan, is a method of investing, wherein a fixed amount gets invested automatically for you. It’s great when you don’t have a large amount to invest upfront, but you want to invest small amounts on a monthly basis.
Lump Sum or one-time Investments
One-time or lumpsum investments are made when we usually have some surplus money in the bank account and want to make that money grow. For instance, if you received a bonus of ₹40,000 in August 2019, you can create a one-time investment and park it in a fund.
So which one is better?
This is very subjective and based on your cash flows. For salaried individuals who have a fixed income patterns, SIPs are a great option. They create discipline and make investing a habit. In case you work as a consultant or an entrepreneur and do not have fixed income patterns you could make one-time investments. This is based on your own personal income patterns and comfort.
SIPs = automation
SIPs are nothing but a process. They are an automated way of investing your money, at your convenience and on your terms. You need to just decide how much money you want to invest every month and systematically. This money will be deducted from your account and invested in different kinds of mutual funds on a date of your choice.
We recommend setting up your SIPs at the beginning of every month, within the first week itself, so that you save before your spend - i.e., you complete your investments before you need to pay for monthly expenses.
Tax saving through mutual funds
We went over this, but here’s a quick refresher. ELSS (Equity linked savings scheme) are tools to save on taxes under Income tax section 80C. Sounds complex, let’s try and make it easy. You should be aware that you can save on taxes by making certain investments: PPF, EPF, 5 year FDs, etc. They all have a lock-in period ( you cannot withdraw your money in that time) & provide tax benefits.
An ELSS gives you tax deduction benefit of up to ₹1.5 lakh under Section 80C. This means you can deduct up to ₹1.5 lakh from your taxable income if you invest in an ELSS fund. ELSS is the only pure equity investment vehicle that offers Section 80C deduction benefits. Growth via an equity plan plus tax savings is an incredible combination :)
An ELSS fund is quite the same as a diversified equity fund. It invests in equity shares of companies across sectors. ELSS comes with a 3-year lock-in. Other equity funds don’t carry a lock-in. However, we suggest you hold it for 5 years at least to make use of the benefits of equity funds.
Withdrawing Mutual Fund investments
As mentioned in an earlier lesson, mutual funds are relatively easy to convert to cash. You should only be liquidating your funds in case of an emergency, or once you’ve hit your financial goal.
Ok, so we’ve established that a mutual fund investment is easy to liquidate. However, there are certain things to keep in mind before going ahead and liquidating your investment.
Lock-in
The mutual fund you invested in could have a lock-in period (e.g. an ELSS fund for tax savings). Open-ended schemes can be redeemed any time.
Taxes
If you need a refresher on how you are taxed, refer back to one of our previous modules. The returns you make from your mutual fund investments (called capital gains) are taxable. Understand the tax implications of redeeming your mutual fund investment. Taxes differ for equity and debt mutual funds.
Penalties and loads
Some mutual funds may have a fee called an exit load that you may need to pay as part of the redemption process. This is typically the case when you are withdrawing within a short amount of time. Either way, check what your exit load payment could be before doing the withdrawal.
