What is mutual fund SIP and how does it work?

SIP Investment or SIP is a mutual fund facility through which you can invest fixed amounts at regular intervals e.g. fortnightly, monthly, quarterly etc in a mutual fund scheme. All open ended mutual fund schemes including Equity Linked Savings Schemes (ELSS) provide SIP facility. Systematic Investment Plan is a highly convenient and effective way of investing in mutual funds.

How does SIP work?

• You need to be KYC compliant to invest in mutual funds. If you have an existing mutual fund investment, you can check your KYC status by going to NSDL or CDSL websites. If you are a new investor or are not KYC compliant, then you need to submit your KYC documents to the Asset Management Company (AMC) or the Registrar and Transfer Agent (RTA).

• To invest in mutual funds through SIP, you first need to select a scheme where you want to invest. You should select a scheme according to financial goals and risk appetite. You should consult with a mutual fund distributor or financial advisor if you need help in selecting the right scheme for you.

• To invest through SIP, you need to provide a one-time National Automated Clearing House (NACH) or Electronic Clearing System (ECS) mandate; this also known as bank mandate. Through the mandate, you authorize the AMC to debit the SIP investment amount every month or any other interval (as specified by you in the bank mandate) from your bank account.

• Once the NACH / ECS mandate is provided to the AMC, the SIP amount will auto-debited every month from your bank account, provided there is sufficient balance in your account. If the balance in your savings bank account is not sufficient for the SIP transaction, then the transaction will fail – there is no penalty for insufficient balance. However, if the SIP transactions fail for 3 consecutive months due to insufficient balance, then your SIP mutual fund investment will stop and you will have to start a new SIP, if you want to continue.

• On each SIP date, monthly or any other interval specified by you, the SIP instalment will be get debited from your savings bank account and get invested in the scheme of your choice based on prev  ailing scheme NAV (Net Asset Values). Suppose you have a monthly SIP of Rs 10,000 in a scheme. On the first SIP date, the NAV of the scheme is Rs 200 – the AMC will allot 10,000 ÷ 200 = 50 units to you. On the next SIP date, the mutual fund NAV of the scheme is Rs 190 – the AMC will allot 10,000 ÷ 190 = 52.63 units to you.

• Each SIP instalment will be treated as a separate transaction from an exit load and taxation standpoint. For example, if you continue a monthly SIP in an equity fund for 10 years i.e. 12 X 10 = 120 monthly instalments, the last 12 instalments may be subject to exit load and short term capital gains taxation. You should plan your redemptions accordingly.

• Your mutual fund SIP will continue till the SIP end date mentioned by you in bank mandate. You can also stop your SIP at any time, by sending a stop SIP request to the AMC or RTA.