If you invest in mutual funds regularly, building your portfolio with a clear strategy matters. A common mistake investors make is buying units when valuations are high, which tends to drag down overall returns over time.
The way around this is to buy mutual fund units across different price levels, which effectively averages out your purchase cost. The simplest way to achieve this is through a Systematic Investment Plan (SIP).
How SIPs help boost your returns
For those unfamiliar with the term, an SIP is an instruction you give to a mutual fund house authorizing it to deduct a fixed amount from your bank account at set intervals—weekly, monthly, and so on—and invest it into a chosen scheme.
Here's an example to illustrate. Say you want to put ₹5 lakh into a mid-cap fund, but your wealth advisor cautions against investing in mid-caps this month due to elevated valuations. At the same time, you don't want to miss out on potential future gains.
The answer is to invest through smaller, staggered amounts—essentially, via SIPs. This lets you build exposure to your chosen fund category (mid-cap or small-cap) without the risk of entering at an unfavorable time.
One wealth advisor we spoke to notes that long-term wealth isn't built by timing the market, but by how long one stays invested in it, which is why staying invested for as long as possible should be the goal—and an SIP is the best vehicle for that.
When it comes to calculating capital gains tax on SIP investments, the FIFO (first-in, first-out) rule applies: units purchased earliest are treated as the ones redeemed first. Based on this, you can determine whether short-term or long-term capital gains tax applies. For equity mutual funds, long-term capital gains tax kicks in once the holding period exceeds 12 months; for non-equity funds, this threshold is 24 months.
Where do STPs fit in?
A Systematic Transfer Plan (STP) works on a similar principle to SIPs—it lets you temporarily park your money in one fund before gradually shifting the proceeds into your target fund.
For instance, suppose you want to invest ₹5 lakh in a small-cap fund, but given current high valuations, you decide to spread this out via SIP over 10 months, investing ₹50,000 each month.
The question then is what to do with the remaining funds during those 10 months. You could keep them in a fixed deposit, or alternatively, park them in a debt mutual fund yielding roughly 7–8% annually, and progressively transfer that money into the small-cap fund. This transfer mechanism is what's known as a Systematic Transfer Plan (STP).
For retail investors, the smartest approach is often to combine SIPs with STPs—this way, you not only average out your acquisition cost but also earn a reasonable return on your money while it waits to be deployed.
Ultimately, sound planning and disciplined investing remain the foundation of building wealth over the long run.
