Naa Songs
Everyone talks about starting a SIP like it’s the simplest thing in the world. Open an account, pick a fund, set up monthly payments, and watch your wealth grow. If only it were that straightforward.
The reality is that there are several important aspects of SIP investing that most people only discover after they’ve already committed their money. These aren’t necessarily deal-breakers, but knowing them upfront helps you make smarter decisions and set realistic expectations.
Your Returns Aren’t Actually Your Returns
When someone tells you their mutual fund delivered 12% returns last year, they’re probably sharing the gross figure. What they actually received in their account was less—sometimes significantly less.
Every mutual fund charges an expense ratio, which is a percentage of your investment that covers fund management, administration, and distribution costs. This fee gets deducted from your returns automatically, so you never really see it leave your account. It just quietly reduces what you earn.
For equity funds, this expense ratio can range from nearly nothing to 2.25% depending on the fund’s assets under management. Debt funds typically have lower ratios, ranging up to 2%. If your fund earned 12% but has an expense ratio of 2%, you’re actually getting 10%.
Over a ten-year investment horizon, even a 1% difference in expense ratio can translate to lakhs of rupees in lost returns. Most investors never compare expense ratios between similar funds, which is exactly why many financial planners emphasize this aspect during portfolio reviews.
Direct plans of the same fund have lower expense ratios than regular plans because they don’t include distributor commissions. The difference might be 0.5% to 1%, which sounds small but compounds significantly over time. Yet many investors continue buying regular plans simply because that’s what their bank or financial advisor offered them.
The Exit Isn’t as Free as the Entry
Most mutual funds don’t charge you anything to start a SIP. The entry is smooth and welcoming. But try leaving before they want you to, and suddenly there’s a fee waiting.
Exit loads are penalties for redeeming your investment within a specified period, typically one year for equity funds. The standard exit load is 1% of your redemption amount. So if you need to withdraw ₹5 lakh within the first year, you’ll lose ₹5,000 just for pulling your money out.
This isn’t hidden information—it’s disclosed in every fund document. But most investors don’t actually read those documents before investing. They only discover the exit load when they try to redeem units prematurely, often during a financial emergency when losing that extra percentage hurts even more.
Different fund categories have different exit load structures. Some debt funds charge exit loads for much shorter periods, while certain funds have no exit loads at all. Knowing this beforehand helps you match your fund selection with your liquidity needs.
There Are Small Fees Nobody Mentions
Banks charge a one-time fee for setting up the e-mandate that allows automatic SIP deductions from your account. This ranges from ₹50 to ₹236 depending on your bank. It’s not a huge amount, but it’s rarely mentioned during the sales pitch.
If your SIP amount exceeds ₹10,000, a transaction charge of ₹100 applies for new investors and ₹100 for existing investors as well. This isn’t charged upfront though. Instead, it gets deducted gradually across your second, third, fourth, and fifth SIP installments at ₹25 each. Many investors notice these small deductions and wonder where they came from.
Securities Transaction Tax (STT) applies when you eventually redeem your equity fund investments. This tax gets deducted at the time of sale, slightly reducing your final proceeds. Again, not a massive cost, but one more thing eating into your returns that nobody mentioned when you started.
The Past Performance Promise Is Misleading
Every SIP advertisement and fund brochure includes the mandatory disclaimer: “Past performance is not indicative of future returns.” Everyone reads it. Almost nobody truly absorbs what it means.
Funds prominently display their impressive five-year or ten-year returns to attract investors. What they don’t mention is that those returns came during specific market conditions that may not repeat. A fund that delivered 18% annually over the past decade might deliver 8% over the next decade, or even negative returns during certain periods.
Most individual investors chase recent performance, moving money into funds that have done well lately. This often means buying high, which is exactly the opposite of what successful investing requires. Many financial planners in Mumbai and other cities spend considerable time explaining this concept to clients who want to invest only in last year’s top performers.
The fund manager who delivered those excellent historical returns might have moved to a different fund or retired entirely. The investment strategy might have changed. The fund’s asset size might have grown so large that it can no longer be as nimble as it once was. Past performance is useful context, but it’s not a guarantee or even a reliable predictor.
Stopping Is Harder Than Starting Psychologically
Technically, you can pause or stop your SIP anytime without penalties, as long as you’re not redeeming units. Most fund houses allow SIP pauses for three to six months. The mechanical process is straightforward.
The psychological part is what gets complicated. Once you stop a SIP, restarting it requires overcoming inertia all over again. Many investors who pause their SIPs during temporary cash flow issues never restart them, losing out on years of potential compounding.
There’s also timing anxiety. When should you restart? Should you wait for markets to fall? What if they keep rising? These questions prevent action, and months turn into years. This is why financial planners emphasize choosing a sustainable SIP amount from the beginning rather than committing to an aggressive amount you’ll likely need to pause.
Direct Plans Exist and They’re Better for You
Here’s something most bank relationship managers and traditional distributors won’t volunteer: you can buy the exact same mutual fund in two versions—regular and direct. The direct version costs less and therefore delivers higher returns.
The difference exists because regular plans pay a commission to the distributor who sold you the fund. That commission comes from your investment returns through a higher expense ratio. Direct plans eliminate the middleman and pass those savings to you.
For the same fund, the difference might be 0.5% to 1% annually. Over twenty years of investing, that seemingly small percentage difference can amount to several lakhs of additional wealth. Yet the vast majority of SIP investments in India still happen through regular plans simply because investors don’t know direct plans exist.
You can buy direct plans through the asset management company’s website or app, or through certain investment platforms that offer them. The process is identical to buying regular plans. There’s no extra complexity, just better returns.
You Still Need to Pay Taxes
SIP investments feel like long-term wealth building, and they are. But that wealth isn’t entirely yours once it starts growing—the tax department wants its share too.
Equity mutual funds held for more than one year qualify as long-term capital gains, which are taxed at 10% on gains exceeding ₹1 lakh annually. Short-term gains on equity funds face 15% taxation. For debt funds, the taxation rules are different and often less favorable.
Many investors plan their financial goals based on projected SIP returns without factoring in taxes. If you’re calculating that your SIP will create a ₹50 lakh corpus, remember that when you redeem that amount, a portion goes to taxes. Your actual available amount will be less, potentially impacting whether you can fully fund your intended goal.
Working with knowledgeable financial planners helps you incorporate tax-efficient strategies into your investment approach from the start. They can suggest fund categories and redemption timing that minimize your tax burden legally.
Getting Started Right
None of these realities should discourage you from starting a SIP. They remain one of the most effective wealth-building tools available to regular investors. But going in with complete information helps you make better choices.
Choose direct plans when possible to maximize returns. Compare expense ratios between similar funds. Understand exit loads before investing so you can match fund selection with your liquidity timeline. Set up SIP amounts you can genuinely sustain without needing to pause. Factor taxes into your goal calculations.
These aren’t complicated adjustments, but they make a meaningful difference to your eventual outcomes. The information is all publicly available—it just doesn’t get emphasized during the sales process. Now you know what nobody tells you before you start, which puts you ahead of most investors taking their first steps into mutual fund SIPs.
