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How well do you really know Systematic Investment Plans (SIP)?

How well do you really know Systematic Investment Plans (SIP)?

  • Q1. SIP is a type of mutual fund?
    • Wrong!

      False

      You seem to be new to SIP investing. SIP stands for Systematic Investment Plan. This is not a type of mutual fund but rather a financial planning tool - a mode of investing whereby you can invest specified sums of money consistently at specified intervals (generally weekly, monthly or quarterly) in your choice of mutual fund/s. Continue with the quiz to learn more about SIP investing.

      That’s right! You understand the basic premise of SIP investing. SIP is not a type of mutual fund but rather a mode of investing in mutual funds whereby regular, periodical investments are made in mutual funds of your choice.

  • Q2. What is the best way offered to set up SIP mode of investing?
    • Wrong!

      Set up a standing instruction to auto-debit my account each month

      Well, this isn’t entirely correct. While you can opt for an offline mode for investing in SIPs – Asset Management Companies (AMCs) in conjunction with banks offer the facility of setting up an online mandate – somewhat like a standing instruction to the bank to auto-debit your account with the specified investment amount at the specified date each month. This is a more convenient and hassle-free way of SIP investing.

      Well, this isn’t entirely correct. While you can opt for an offline mode for investing in SIPs – Asset Management Companies (AMCs) in conjunction with banks offer the facility of setting up an online mandate – somewhat like a standing instruction to the bank to auto-debit your account with the specified investment amount at the specified date each month. This is a more convenient and hassle-free way of SIP investing.

      You seem to be on track to set up your investments through SIPs. You can most definitely opt for an online mandate for SIP investing for easy and convenient investing. This will allow your bank to auto-debit your bank account with your SIP amount each month.

  • Q3. Which of these benefits can you get from investing in SIPs?
    • Wrong!

      All of the above

      Surely this is one of the benefits. But SIP investing actually gives you all of the above benefits. Regular, consistent investments help keep you on track with your investment planning, inculcating financial discipline. SIP investing ensures you buy more units when prices are low and lesser units when prices are high – eventually averaging out the overall cost of your investment. Cumulative investing through SIPs have the potential to earn returns on your returns which may help you accumulate a larger invested sum over time – giving you the benefit of compounding.

      Surely this is one of the benefits. But SIP investing actually gives you all of the above benefits. Regular, consistent investments help keep you on track with your investment planning, inculcating financial discipline. SIP investing ensures you buy more units when prices are low and lesser units when prices are high – eventually averaging out the overall cost of your investment. Cumulative investing through SIPs have the potential to earn returns on your returns which may help you accumulate a larger invested sum over time – giving you the benefit of compounding.

      Surely this is one of the benefits. But SIP investing actually gives you all of the above benefits. Regular, consistent investments help keep you on track with your investment planning, inculcating financial discipline. SIP investing ensures you buy more units when prices are low and lesser units when prices are high – eventually averaging out the overall cost of your investment. Cumulative investing through SIPs have the potential to earn returns on your returns which may help you accumulate a larger invested sum over time – giving you the benefit of compounding.

      You definitely know how beneficial SIPs can be! SIP investing provides all of these benefits to its investors.

  • Q4. How is rupee cost averaging beneficial to you as an investor?
    • Wrong!

      Eliminates the need to time the market

      Well, this isn’t correct. Rupee cost averaging helps to average out the cost of overall investment – by buying a greater number of units when the prices are low and lesser number of units when the prices are high. This eliminates the need to analyze market prices and gauge the correct time to invest. SIP investing averages out the cost of the investment across different market cycles eliminating the need to time the market.

      You are absolutely right. Rupee cost averaging helps to average out the cost of overall investment – by buying a greater number of units when the prices are low and lesser number of units when the prices are high. SIP investing thus eliminates the need to time the market through rupee cost averaging.

      Well, this isn’t correct. Rupee cost averaging helps to average out the cost of overall investment – by buying a greater number of units when the prices are low and lesser number of units when the prices are high. This eliminates the need to analyze market prices and gauge the correct time to invest. SIP investing averages out the cost of the investment across different market cycles eliminating the need to time the market.

  • Q5. How does SIP investing score over lumpsum investing?
    • Wrong!

      Both of the above

      While this is partially true, SIP investing actually scores over lump sum investing on both of the above parameters. The success of lump sum investing is dependent on the time at which the investment is made i.e.: in a bullish or bearish market. This factor is practically eliminated in SIP investing with rupee cost averaging. SIP investing is spread across instalments which can be periodically stepped up. This benefit of compounding is limited in lump sum investing as it is generally a one-time investing exercise.

      While this is partially true, SIP investing actually scores over lump sum investing on both of the above parameters. The success of lump sum investing is dependent on the time at which the investment is made i.e.: in a bullish or bearish market. This factor is practically eliminated in SIP investing with rupee cost averaging. SIP investing is spread across instalments which can be periodically stepped up. This benefit of compounding is limited in lump sum investing as it is generally a one-time investing exercise.

      You definitely understand why SIP investing could be chosen over lump sum investing. It offers both the benefit of compounding as well as eliminates the need to time the market in comparison to lump sum investing.

  • Q6. Which of the following is true about quantum of SIP investing?
    • Wrong!

      SIP amounts can be altered as well as stopped during its tenure

      This is not true. Flexibility is one of the key features of SIP investing. It allows the investor the freedom to alter the amount of SIP or stop it all together. Some SIPs also offer a pause feature to its investors to tide over periods of low income or emergencies. SIPs also offer a ‘top-up’ feature that allows investors to periodically step-up the SIP amount as their income levels increase.

      That’s right. You understand the inherent flexibility of SIP investing. It allows alteration in the amount of SIP as well as completely stopping the same.

  • Q7. SIP mode of investing is only good for small investors?
    • Wrong!

      False

      This is not correct. While SIP investments may be attractive to small investors it does not mean that they are not equally beneficial for large investors. SIPs are a popular choice amongst HNIs as well who invest significant amounts through SIP investing to gain from its benefits.

      You are on point! SIP investing is beneficial to small and big investors with the range of investment starting from as low as INR 500 with generally no maximum threshold.

  • Q8. Which of the following statements about timing of SIP investment is true?
    • Wrong!

      SIP investments can be purchased on any day of your choice

      This is not entirely true. Certain AMCs offer ‘Any-day SIP’ feature that allows you to choose any day as the date of debit for your SIPs. In case the selected date falls on a non-business day in any month, the SIP will be transacted on the subsequent business day..

      You seem to have in-depth knowledge of the nuances of SIP investing. This is possible with ‘Any-day SIP’ feature offered by certain AMCs.

      This is not entirely true. Certain AMCs offer ‘Any-day SIP’ feature that allows you to choose any day as the date of debit for your SIPs. In case the selected date falls on a non-business day in any month, the SIP will be transacted on the subsequent business day..

  • Q9. How do you determine period of holding for SIP investments, for income tax purposes?
    • Wrong!

      Individually, from the date of each SIP

      You are mistaken in this aspect. When SIP investments are redeemed, the period of holding to determine whether it is a short term or long-term sale for taxation purposes is determined individually from the date of each SIP. Furthermore, FIFO basis is used for redemption of SIP investments i.e.: the investments made first are considered to have been redeemed first.

      You certainly have advanced level knowledge of SIP investing. Every SIP investment is considered as a separate investment for determining period of holding for taxation purposes.

      You are mistaken in this aspect. When SIP investments are redeemed, the period of holding to determine whether it is a short term or long-term sale for taxation purposes is determined individually from the date of each SIP. Furthermore, FIFO basis is used for redemption of SIP investments i.e.: the investments made first are considered to have been redeemed first.

  • Q10. Is there any penalty for stopping or pausing your SIPs?
    • Wrong!

      No

      This is not true! SIP investing is highly flexible and per se does not levy any penalty or charges if it is stopped or paused before completion of its tenure. One must note that this is different from any ‘exit load’ that may be a charged by a specific mutual fund for redemption before its specified tenure.

      You are absolutely right! SIP investing does not levy any penalty if it is stopped or paused during its tenure.

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