Systematic Investment Plan
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The market revolutionary change happened, achieved fame and many of us heard of it without knowing much about it.
Unfortunately, many new investors seem to be under a misconception that it is a type of mutual fund. A Systematic Investment Plan is not a type of mutual fund; it is a method of investing in a mutual fund.
Here's to coming to terms associated with mutual funds. There are two ways in which we can invest in a mutual fund.
1. A one-time outright payment
If we invest directly in the fund, we just hand over the cheque and we get our fund units depending on the value of the units on that particular day.
2. Periodic investments or SIP (Our present area of concentration)
This is referred to as a SIP.
That means that, every month, we commit to investing, say, Rs. 1,000 in our fund. At the end of a year, we would have invested Rs. 12,000 in our fund.
Tax implications - Let's say we have invested in the SIP option of a diversified equity fund. If we sell the units after a year of buying, there is no need to pay capital gains tax. If we sell if before a year, we are required to pay capital gains tax of 15%.
Let's say we have invested through a SIP for 12 months: January to December 2010. Now, in February 2011, we want to sell some units. The system of first-in, first-out applies here. So, the amount we invest in January 2010 and the units we bought with that money will be regarded as the units we sell in February 2011.
For tax purposes, the units that we sell first will be considered as the first units bought.
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