Tarun Birani on different kinds of SIPs, investment and taxation

"In my mind, it makes sense to go with lump sum investment in debt funds. But if you are working towards making a short-term corpus and building good habits, maybe one can start SIPs into debt funds also or one can go for hybrid balanced advantage fund SIPs also," says Tarun Birani, Founder & Director, TBNG Capital Advisers

What is an SIP? Is it an investment route or is it a vehicle?
SIP is one of the buzzwords today. We are adding almost Rs 12,000 crore in SIPs on a monthly basis in India. SIP is nothing but a concept which drives a regular investment structure for the investors. Again, it has been built up based on the challenges with equity investing because equity investing people tend to keep observing investment returns over a short period of time which may or may not give very good returns.

SIPs came into existence because of rupee cost averaging, where one has an option to buy Rs 1 lakh worth shares today by dividing that one lakh into 10 or six installments which over a period of time reduces the cost of acquisition. We have observed that at no point of time does the market remain the same for 10 months. There is always volatility. So SIP as a concept helps investors to do rupee cost averaging.

Along with this, there are many other benefits of SIPs. But let us start with a very basic question. How many times can you do an SIP in a month?
I think with the new automated investing systems, it is possible to do SIP on a weekly basis, monthly basis and there are some asset management companies which are looking at daily SIPs also. Otherwise, instead of SIP you can take a STP option – the systematic transfer plan – which is nothing but a larger version of SIP wherein you can put money on a daily basis also. It is up to the investor’s requirement and it is completely flexible.

You are telling me that one can SIP every day, every week, every month and even a yearly SIP which will be a lump sum?
Yes, that is correct.

A lot of times people do not understand the kind of dates they should be selecting. Are there any specific dates that one should be selecting to do an SIP or does it pan out as per your convenience? It is very important to maintain discipline which comes at the times you are doing an SIP and also in the amount that you are investing. How can one figure this out?
One important point is that the market tends to move in cycles. It is fuelled by greed and fear that means that stocks are dirt cheap at times and at another time are unreasonably expensive. However, equity tends to converge with the genuine earnings potential over a period of time. Investing in SIP over time would result in acquisition of equity at varying valuations which would average out to the mean.

A study was done by an asset manager regarding the exact question which you were asking – whether one should time the SIP or keep it on variable dates? The study, after analysing the rolling return SIP data for almost 10 years, arrived at the conclusion that the date for the SIP one selected made no major difference. It is immaterial because SIP is a long-term vehicle hence and instead of accounting for return expectation, one should select the most convenient date which can help you make it more like a habit.

Most of the time, say salary gets credited on 1st of every month. May be 5th or 10th could be a great day because the money is available in your account and it would be a good habit to build. The whole idea of SIP is to build healthy habits of investing wherein like an EMI which you pay for a loan for your long term future, here you are saving money like an EMI concept. I feel investing is all about behaving correctly and SIP helps in behaving correctly.

Help me also understand how is an SIP different from an RD?
RD is Recurring Deposit and it is used for fixed income instruments like fixed deposits wherein the bank keeps coming with a RD kind of structure where you keep investing at a regular interval recurring basis. They give options on a daily and weekly basis because it helps in building a habit. But SIP is more of a mutual fund concept where in case of RD, the interest rate more or less remains the same but in case of SIP, you end up buying at different NAVs and end up making a volatility benefit.

SIPs can be done specifically only in mutual funds or different financial instruments which would mean shares as well?
Yes, you can do SIP across financial instruments. It is up to you, Any investment which is volatile in nature and which keeps going up and down. A lot of portfolio management services (PMSs) have started SIP options, subject to maintaining Rs 50 lakh ticket size minimum. A lot of discount brokerages have also started stock SIPs. So, SIP will be extremely beneficial in anything which is volatile or variable in nature.

Is there any difference between doing SIP in a mutual fund and doing SIP in a stock? Does the cost averaging differ?
We are talking of completely different animals. Stock SIPs require a deeper research and I think 95% of the investors do not possess that skill to acquire the right stock at the right time. So stock investing is always based on recency bias or greed and fear and due to that, people keep on getting carried away on the stock part.

Again, researching a stock over a period in regular intervals like quarterly earnings or attending annual general meetings sometimes proves to be very difficult for investors. But in the case of the mutual fund, one gets professional support. One outsources the investing research to someone else. I feel the mutual fund SIP is much more convenient but if you have the skill set as well as the time, then maybe a stock SIP can also be looked at.

In terms of tax implications, if you want to redeem your SIPs or the money that you have accumulated, how much time should you be giving each and every SIP?
Again on the equity SIPs, any investment which is done for more than one year makes you eligible for long term capital gains and in case of debt investments, any investments done for more than three years makes it long term capital gains. It is always advisable to have this kind of minimum horizon.

What happens is when you do the SIP investment, let us say you started on January 1, 2023 and your SIP installments go for 12 months. So the last unit which we acquired on December 1, 2023 from there till one year, one needs to calculate. People tend to make that mistake many times while calculating the capital gains.

Do you prefer people doing lump sum investment in debt and SIP in equity instruments?
Normally debt mutual funds have a certain yield to maturity being quoted for them along with the average maturity of all bonds paper etc. what they hold. These YTM tend to change on a daily basis like we have seen in last two days, the YTMs of most of the debt funds have moved dramatically with the change in the inflation numbers which are coming in.

It is very important to lock in those YTM at the right times. In my mind, it makes sense to go with lump sum investment in debt funds. But if you are working towards making a short term corpus and build good habits, maybe one can start SIPs into debt funds also or one can go for hybrid balanced advantage fund SIPs also.