Mentioned below are the benefits of a systematic investment plan:
1. Disciplined Investing: When investing via SIPs, one need not analyse the market or determine a suitable time to invest as the SIP instalment amount gets auto-deducted from your account and goes into mutual funds.
2. Rupee Cost Averaging: Rupee cost averaging is a unique feature of SIPs as an investor can buy more units when the market is low. Similarly, one will buy lesser units during an upswing market. As a result, investors can navigate market fluctuations and make their investments averse to volatility.
3. Benefits of Compounding: This is one of the top benefits of SIP investment. A systematic investment plan operates on the principle of compounding, which takes place when profits earned on an investment are reinvested, thereby increasing potential returns. Therefore, one’s investment will generate earnings not only on that initial investment amount, but on the interest earned subsequently as well.
4. Simultaneous Investments: As one can invest in SIPs with just ₹500, one can invest in multiple funds simultaneously. Thus, you can reap benefits from various mutual funds at a time.
5. Tax Benefits: Before investing, it is important to know the SIP tax benefits. Tax rules are the same in SIP mutual funds. We have mentioned the tax liability based on fund types here.
- Equity Funds: For equity funds, short-term capital gains are taxable at 15%. On the other hand, long-term capital gains up to ₹1 lakh in a year are exempt from tax. Moreover, gains exceeding ₹1 lakh are taxed at 10%.
- Debt Funds: With debt funds, short-term gains get taxed as per one’s tax slab, while long term gains get taxed at 20%.
- Hybrid Funds: Equity-oriented hybrid funds are taxed as pure equity mutual funds. Likewise, debt-oriented hybrid funds are taxed like debt funds.
Pro Tip: Investing in an ELSS through a systematic investment plan can act as a tax-saving instrument. With this investment, investors can claim a deduction of up to ₹1.5 lakh under section 80C of the Income Tax Act, 1961.