Money is the game changer in every situation, no doubt about it. Your present and future conditions are dependent solely on money. Therefore, you should harness the potential of investments for a secured future. Investment is a broad term. Here, we will focus on the systematic investment plan (SIP) aspect of investments. We will also analyze the benefits of investing in a SIP and calculations associated with SIP.
What is Systematic Investment Plan (SIP)?
A Systematic Investment Plan (SIP) is an investment mode wherein an investor allocates a pre-determined amount of money in mutual funds. This investment is made at regular intervals. It can be weekly, biweekly, monthly, quarterly, and so on. The objective of the investment is to earn interest on the investment.
Two important terms related to SIP:
- Rupee-Cost Averaging – When you invest a fixed amount of money at once, you buy a certain number of units at the current market rate. When you buy the units by investing a certain amount of money over a fixed duration, the current market is different at every particular time. This means that the price may fall or rise. The average amount is calculated after the tenure of the investment. This amount is known as Rupee-Cost Averaging in SIP.
- Compound Interest – The interest in SIP is calculated using compound interest. Hence, the earlier you invest, the more you earn. Later in the article, we will study in detail about this aspect.
Rate of Return
Also known as Initial Rate of Return (IRR), this is the total amount of money accumulated after the investment tenure. This includes the invested amount and the total interest earned on that amount.
The rate of return may vary for investments made for different tenures. Moreover, the calculation procedure may vary as well. It can be calculated by using a pre-determined formula or it can be calculated by using Excel calculations. Here, we have listed two formulas:
If Tenure is less than 12 months
Rate of return = [(current NAV – initial NAV)/initial NAV]*100
If Tenure is More than 12 Months
Rate of return = (((current NAV/initial NAV)^(1/number of years)) – 1)*100
To perform hassle free SIP calculations, you can always use an SIP calculator.
Taxation in SIP
SIP is classified under mutual funds scheme. The mutual funds are invested in equities. If 65% or more of the total amount is invested in equities, then it qualifies to be taxed. But, if the return is from the investments held for more than a year, there is no taxation. This is because long-term capital gains are exempted from tax. If the return is from short term capital gain, then 15% tax is levied on the return. Short term capital gains are related to investments made for less than a year.
There are two kinds of SIP – dividend and growth. Dividend SIP is the one where an investor regularly gets the dividend, or profit, from the company owners. The dividend value is decided according to the profits gained by the company. In the case of growth SIP, the profits are again re-invested to harness the market potential for more profits.