Systematic Investment Plans in equity and debt funds come with more advantages, including lower tax burden for some, than saving through recurring deposits.
For years, Indians were happy with high rate of interest they earned from putting their money in bank fixed deposits (FDs) and recurring deposits (RDs). The second option was lucrative to a large number of people as in this case, compared to FDs, they could save as they earned. In case of RDs, the regularity of earnings by a salaried person could be matched with the regularity of saving as well.
Those were comfortable days when rate of interest was regulated by the government and hence people could enjoy high rate of interest. Over the years, however, as interest rate was deregulated and became more market determined than administered, banks also started cutting the rate of interest on FDs and RDs and made them linked to market rate of interest. This in turn prompted investors to look at alternative options to earn high return over the long as well as short term.
Investors now have the option to invest in mutual funds through the systematic investment plan (SIP) route, which offer superior returns when compared to RDs by banks. While RDs are seen more suitable for conservative, risk-averse investors, SIPs in equity funds are for those investors who are willing to take higher risks while SIPs in debt funds are usually suitable for those investors with slightly lower risk appetite than the investors in equity funds.
There are several advantages to investing your money through the SIP route compared to bank RDs. Firstly, since SIPs do not offer any guaranteed return, this opens up the chance for one to earn a much higher rate of return than RDs can offer. SIPs also offer the chance of capital appreciation, that is returns after adjusting for inflation, than saving through RDs, where there is a very low chance of capital appreciation. This is because mutual funds are market linked while RDs come at a pre-determined fixed rate of return and this rate is closely linked to the rate of inflation. Investing through SIPs are offer higher tax efficiency compared to RDs.
Some of the things investors should keep in mind while investing in SIPs are: >> Be careful about your risk profile and suitability of the SIP you are investing in. In you are a conservative investor, you should not set up an SIP in a fund that has higher risk rating than you should take. >> Check out the exit loads before investing in an SIP. Especially in case of debt funds, be careful about the exit load. Since you get lower rate of return in debt funds than equity funds, an exit load may further lower your return. >> If you are not experienced enough, seek help from an experienced financial planner or advisor. In RDs, in the last 15 years the rate of return has varied between 12% for the long term and 6% in the short term.
This article has been exclusively created for UTI SWATANTRA