Small investments at lesser risks? Go the SIP way

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You can invest in mutual fund with a minimum of Rs 50. ICCI Pru has recently launched a micro SIP with a minimum investment of Rs 50. Reliance SIP starts from an investment of Rs 100. While there is no lock-in period in many schemes, lock-in period for Reliance micro is five years. Generally, the entry loads for the SIPs are 2.25 per cent, a three per cent exit load is charged if you exit from the ICICI Prudential micro SIP scheme before five years. SIP is good for those who can't invest big amounts. If you look at the returns given by the top five equity diversified funds in the past two years, returns from SIP have been 5 per cent to 11 per cent lesser than returns from non-SIP or investment in a lump sum. SIP is a good way of investing small sums with minimum risk involved.

Excerpts from CNBC Awaaz�s exclusive interview with Dhirendra Kumar, CEO, Value Research Online:

Q. Does SIP give you same benefit through market ups and downs?

A. If you invest lump sum in a market, you generally have a harrowing time managing anxiety levels when the market shakes. If you invest methodically and invest over a long time on a regular basis, you can start with a small amount. It also helps investor remain focused.

Q. Should one go for existing or new fund when one invests in mutual fund through SIP? While only existing funds allowed SIP earlier, new funds have now started giving the option of SIP from start.

A. My advice is to go for existing funds, which have been tried and tested. Although track record doesn't mean much to investors, performance of the fund can be taken into account while choosing a fund. To make money from equity, you choose a good fund. As new fund doesn't guarantee good performance, it is better you go for an old fund. At least it is easy to know track record of an old fund.

Q. Subscription limit of SIPs has been brought down from a minimum of Rs 500 to Rs 50 per month by the mutual fund companies. What kind of value should an investor expect when he or she invests a small amount?

A. One should not look at it in terms of value. In fact, SIP has democratised mutual funds. Earlier not everybody could afford to invest in mutual funds. Now everyone can participate in the market. When you invest in micro SIP, your focus will not be on daily returns and you are likely to get good returns in four to five years. Until now the mutual funds have been viewed as an opportunistic investment, but with the launch of micro SIP, investors will see it as a medium of small saving also.

Q. Should one invest in SIP when the Sensex is moving up?

A. SIP is for those who get bothered with the share market ups and downs and therefore are not able to start investment in the market. I suggest don't bother about market ups and downs and invest regularly and select a good fund.

Q. What is the impact on the SIP returns of the falling NAVs of the mutual funds when the market goes down? Is the magnitude of the impact on the SIPs same as that on the lump sum investment in mutual funds?

A. When the market falls, the NAV or value of the mutual fund also comes down. But for SIP investor, it is a good medium of anxiety management. For regular investors, it is good in the sense that they can buy at lower rates when the market is at a low. However, it is not so good if you have to withdraw money in next two months and the market falls just around that time. So it is important to plan your withdrawals.

Q. What is the difference between micro SIPs and SIPs?

A. If one withdraws money from SIPs of small amounts (micro SIPs), one has to pay an exit load of 3 to 4 per cent. I think it is good in a way because it prevents investors from withdrawing money early and therefore from losing on the benefits. However, there is no compromise on liquidity as you can withdraw money at any time. So on paying an exit load, one can always withdraw money from the SIP. I don't think it is a big deterrent.

Q. When does the SIP become free from capital gains tax? Is there no capital gains tax in mutual funds after one year?

A. Same tax laws that apply to equity investments, apply here too. Unless your investment is one-year old, you have to pay 10% capital gains tax on the investment. So you have to give tax on the gains from new investments and not on the old ones.

In order to free your investment in one-year SIP from capital gains tax, one has to give it two years so that the last installment of the investment also becomes tax-free. In nutshell, all units from investment in SIPs will become free from capital gains tax after one year of investment. So your entire money will become tax free if you stay in it for two years.

Q. I want to invest Rs 2,000 in mutual funds through SIP. Where should I invest keeping in mind my target of Rs 25 lakh for a 20-year period?

A. Don't get bogged down by ups and downs of the market and stay focused. Review all your investments after one or two years. HDFC's equity, Franklin's Prima Plus, Reliance Vision fund, Prudential Power Fund are among good equity funds. If you have to invest for ten years at the end of which you require 25 lakh, put in at least Rs 3,000 to Rs 5,000 through SIP. However, there is no guarantee that you will get this amount.

Q. I want to invest Rs 5,000 in a mutual fund but prefer to have more than one fund instead of putting all the money in a single fund. Is it a good decision or should I diversify amongst many funds?

A. Though it is a good decision to diversify, don't go for sectoral and thematic funds. Choose two good diversified equity funds and put in 2,000 each and third could be a good mid cap fund in which you can invest Rs 1,000. Don't invest in one fund family.

As far as achieving adequate diversification is concerned, choose three to five funds and not beyond it. here you can also benefit from the expertise of different fund managers.

Q. I want to invest in Magnum Tax saver for three years through SIP. At the time of redemption, can I withdraw money every month like in case of SIP or I have to withdraw the entire amount after three year? And when should one sell mutual fund?

A. There should be only two reasons for selling a mutual fund -- either when you need money or when you are not happy with its performance. However, don't sell a fund if it has under performed for two to three months. However, you can regularly sell it.

Magnum Tax saver is a good fund, an aggressive one. It has performed very well in the past 3-4 years. If you invest regularly and withdraw the money once it is three year old.

Q. What should be the ideal time for starting an SIP?

A. It depends on the kind of time horizon you have. But you should stay invested for at least three years and further keep it for one to two years in order to take its full benefit. You may not experience full market cycle in a time less than that.