Building your portfolio intelligently is crucial if you invest in mutual funds on a regular basis. At high values, a lot of investors purchase mutual fund units. Unfortunately, this often reduces their total profits.
Understanding SIPs and Cost Averaging
It is advisable to purchase mutual fund units at various price points in order to prevent this. This “averages out” the cost of your transaction. A Systematic Investment Plan (SIP) is the most efficient approach to do this.
What is a SIP?
For those who do not know, SIP is a directive to the Mutual Fund (MF) firm to take a set amount out of your bank account and invest it in a particular scheme on a regular basis, such as once a week or once a month.
Let us provide an example to better grasp this. Let us say your financial adviser advises you not to invest ₹5 lakh in a fund house’s mid-cap scheme this month due to their high valuation. However, you also do not want to overlook the potential benefits in the future.
Investing via Tiny Tranches
A solution? using tiny tranches, or SIPs, to invest in mid-cap funds. You may get exposure to your favorite mutual fund (small-cap or mid-cap) with these tiny investment plans without running the risk of investing at the “wrong moment.”
💰 Key Benefits of SIPs
- Disciplined Investing: Regular investment ensures consistent wealth building.
- Cost Averaging: Reduces the risk of investing at market highs.
- Flexibility: Invest as little as ₹500/month and adjust anytime.
- Power of Compounding: Returns grow significantly over the long term.
- Low Stress: No need to time the market perfectly.
“The amount of time you put in the market is what enables you to develop long-term wealth, not trying to time the market. Therefore, one should concentrate on investing for as long as feasible. According to Preeti Zende, founder of Apna Dhan Financial Services, a SIP is the most effective approach to do this.
Understanding Capital Gains with SIP
One must comprehend the FIFO (first-in, first-out) concept in order to calculate capital gains tax on mutual funds obtained via SIPs. This implies that the initial mutual fund units purchased will be repaid first. To put it another way, the units that are bought first are thought to have been sold first.
The capital gains tax (short-term or long-term, depending on the situation) may then be computed. When the selling date for equity mutual funds is after a year, long-term capital gains tax is applicable. When the selling date for non-equity funds is after 24 months, LTCG is applicable.
Systematic Transfer Plan (STP)
A systematic transfer plan (STP), like SIP, enables you to put your money in a temporary fund until you are able to move the fund’s proceeds to the destination fund.
For instance, you want to invest ₹5 lakh in a small-cap fund, but you want to use the SIP method for the next ten months since small caps are now overvalued. Thus, each month you will invest ₹50,000.
📈 STP: Smooth Transition to Target Funds
- Interim Investment: Keep funds in debt or liquid schemes temporarily.
- Step-by-Step Transfer: Gradually move money to small/mid-cap funds.
- Reduce Timing Risk: Avoid investing large amounts when valuations are high.
- Earn Interim Returns: Gain 6-8% in debt funds before final transfer.
- Long-Term Wealth: Combines STP and SIP for disciplined growth.
However, what about the ten months in between? During this time, you may either put your money in an FD or in a debt mutual fund that yields 7 to 8% annually before progressively transferring it to a small-cap mutual fund. The systematic transfer plan (STP) is the path that makes this transfer possible.
Combining SIPs and STPs for Optimal Investment
Therefore, the ideal course of action for a retail investor is to combine SIPs and STPs in order to maximize his money by receiving a fair return on it in the interim while also averaging out the cost of acquiring his favorite asset.
Never forget that “disciplined investment” and “proper planning” are essential cornerstones of long-term wealth growth.
