Investing through SIPs? Well, there's a downside to it

When in doubt, SIP. This is the advice often given to novice investors who may not be sure when is the right time to buy a share or mutual fund or even an index-based fund. So invest a little every month through what is called the Systematic Investment Plan (SIP).

Now, I wouldn’t rubbish SIP out of hand, but I am not all that gung-ho about it anymore.

Reason: it’s complicated, way too complicated, to maintain investment records for SIPs. Personal finance advisors glibly tell you it’s as easy as A-B-C. Just tell your mutual fund (or e-brokerage) you want to invest Rs 10,000 in XYZ Equity Fund (Growth) for 12 months and you’re done. The money will be debited from your account, and units credited to your demat.

True, but consider what happens when you actually buy a mutual fund through SIPs.

Your Rs 10,000 will be invested in mutual fund units at their current net asset value (NAV), which is, say, Rs 13.45 paise a unit. You will get 743.4944 units. That is, 743 full units and a fractional unit of 0.4944.

Now, next month, if the NAV is Rs 13.39, you get more units. Great. But you now get another fractional holding - 746.8259, or 746 units and a fractional unit of 0.8259.

[caption id=“attachment_741595” align=“alignleft” width=“380”] To calculate capital gains for 12 SIPs, you have to do 12 calculations - all using fractions. Nothing that a calculator or Excel sheet cannot solve, but it’s hardly as easy as A-B-C.[/caption]

So what? you may ask. At the end of 12 months, all these fractions will get aggregated and you will be left with only one fractional unit.

True. But try selling that fractional unit. Mutual funds either want you to sell the whole of the holdings (in which case the fractional unit too will be redeemed) or complete units (as in 743 units).

You can’t sell units the way you bought them - at say Rs 10,000 worth - unless you opt for a Systematic Withdrawal Plan, which has its own complications.

But things get worse when you have to pay taxes on units.

For every SIP bundle you buy, you have to maintain a separate record of buying price and date because you get long-term capital gains benefits - and lower tax rates - only if you have held units (or shares, or exchange traded funds) for a minimum of one year.

So capital gains will have to be calculated on each unit and fractional unit bought as monthly SIP. And the price will have to be adjusted for cost indexation in separate monthly lots. So to calculate capital gains for 12 SIPs, you have to do 12 calculations - all using fractions. Nothing that a calculator or Excel sheet cannot solve, but it’s hardly as easy as A-B-C.

And if you sell the whole bundle, and half the SIPs are long-term and the rest short-term gains, you have another complication coming your way.

I am now wary of SIPs. Instead, this is what I do, but this has its own problems.

I buy units or shares in specific numbers (as in 200 units costing whatever, and not Rs 10,000 invested in 743.4994 units).

This enables me to sell in discrete lots without fractions, but the downside is that the investment cost will vary month to month. Some months you will pay more, and some months less for the same number of units.

It’s less of a hassle, though.