SIP (Systematic investing Plan) is a disciplined investing strategy in which participants contribute a set amount at regular intervals (monthly, quarterly, or yearly) to a mutual fund or other investment plan. It facilitates rupee cost averaging and reaps the benefits of compounding over time.
Lump Sum vs. SIP Investment
SIPs are suitable for long-term wealth growth, particularly for people who wish to invest consistently without being concerned about market swings.
How does SIP work?
Regular Investments (Monthly, Quarterly, or Annual Contributions): SIPs allow participants to invest a predetermined amount in a mutual fund on a monthly, quarterly, or yearly basis. This rigorous strategy helps to average investment costs over time and mitigates the impact of market volatility.
Power of Compounding: SIPs benefit from compound interest, which means that profits on investments are reinvested, results in exponential growth over time. The longer you stay invested, the larger the compounding impact, which aids in wealth generation.
The role of NAV (Net Asset Value): The NAV indicates a mutual fund’s per-unit price. When you invest through SIP, you purchase mutual fund units based on the current NAV. If the NAV is low, you get more units; if it is high, you get less. Over time, this averaging effect, known as rupee cost averaging, reduces investment risk while increasing profits.
SIP Opportunities in Nepal
Mutual Funds and SIPs: In Nepal, mutual funds are the primary source of SIPs. Investors can make recurring contributions to a variety of mutual fund schemes run by asset management organisations. These funds seek long-term gains by investing in stocks, bonds, and other assets.
Available SIP plans in Nepal: Several Nepalese mutual funds have SIP investing opportunities. These funds are regulated and managed by several asset management firms under the Securities Board of Nepal (SEBON). Investors can select between equity-based, debt-based, or hybrid mutual fund schemes based on their financial objectives and risk tolerance.
Role of SEBON and Nepal Stock Exchange (NEPSE): SEBON (Securities Board of Nepal) regulates and manages mutual funds to provide investor safety and transparency. The Nepal Stock Exchange (NEPSE) offers a platform for trading mutual fund units and other investment vehicles, allowing investors to purchase and sell units as needed.
SIP in Nepal is still emerging, but it offers a fantastic chance for long-term wealth growth via disciplined investment.
How Can I Choose the Best SIP?
Investment Duration (Short vs. Long Term)
- Short-term SIP (1-5 years): Ideal for low-risk investors seeking consistent returns with minimal market volatility. Debt and balanced funds are excellent.
- Long-term SIPs (5+ years): Ideal for wealth accumulation since they benefit from market growth and compounding. Equity-based SIPs are advised.
Risk Tolerance
- Low-risk: Investments include debt mutual funds and hybrid funds.
- Moderate risk: Balanced funds (a combination of equities and debt).
- High risk: Equity mutual funds have the potential for bigger gains but are more volatile.
Annual Returns (Performance History)
- Analyse the SIP’s historical returns for 3, 5, and 10 years.
- Compare performance against benchmark indexes and peer funds.
- Choose funds that have regularly outperformed the market over time.
Expense Ratio (management fees)
- The expense ratio is the price charged by fund managers to manage an investment.
- Lower expense ratios lead to better net returns for investors.
- Actively managed funds often charge greater fees than index funds.
By weighing these variables, investors may choose the ideal SIP based on their financial objectives and risk tolerance.
Nepal’s SIP Tax System
Exemptions and Regulations
- Certain mutual fund investments may be eligible for tax benefits under Nepalese tax legislation.
- Mutual funds’ dividends may be subject to withholding taxes.
- Investors should consult SEBON and IRD (Inland Revenue Department) laws for current tax restrictions.
Capital Gains Tax (CGT) on SIP Investments
- Short-term capital gains (held less than a year) are taxed at a higher rate.
- Long-term capital gains (kept for more than a year): Tax rates are often lower.
- CGT rates vary according to investment type (equity, debt, or hybrid funds).
Questions to Ask Before Investing in SIPs
- What is my investing goal? (Wealth generation, retirement, education, etc.)
- What’s my risk tolerance? (Low, Moderate, or High Risk)
- Which sectors or funds are acceptable for SIPs? (Funds might be equity, debt, or hybrid)
- Who is the fund manager? (Experience and track record of the asset manager)
Wealth Creation Strategy using SIP in 2025.
Invest for the Long Term
- Longer investing periods produce higher compounding rewards.
- To maximise your earnings, avoid making frequent withdrawals.
Diversify Across Different SIP Plans
- To mitigate risk, diversify your investments across equities, debt, and hybrid funds.
- Diversification lowers reliance on one asset type.
Take Advantage of Market Fluctuations
- Continue investing during market downturns to purchase additional units at a lower NAV.
- Market corrections might lead to long-term growth possibilities.
Regularly Review and Rebalance Portfolio
- Monitor fund performance and modify allocations as necessary.
- Switch between funds based on market circumstances and financial objectives.
By using these tactics, SIP investors may maximise profits and achieve financial growth in 2025 and beyond.
