Systematic Investment Plans or SIPs are simple in construct. Yet there are different types of SIPs to cater the needs of different investors and requirements. In this article, we look at four major types of mutual fund SIPs that are available in India.
An SIP (systematic investment plan) is a system that helps you invest a specific amount of money at a pre-determined interval. While the concept has generally remained the way it is, mutual fund SIPs have seen minor innovations.
SIPs are becoming mainstream and more consumers are realising the many benefits of SIP investing. If you are a newbie investor, then it will be prudent on your part to learn on how to start an SIP online.
The different types of SIP that are available for mutual fund investors in India are –
- Top Up SIP (also called Step-Up SIP)
- Flex SIP (or Flexible SIP)
- Trigger SIP
- Perpetual SIP
Top-Up SIP or Step-Up SIP
A top-up SIP (or step-up SIP) allows investors to increase the SIP investment amount.
I highly recommend using this option as your income increases. Topping up your investment will help you maximize your wealth over time. It also serves as a very useful tool in goal planning. This continued and incremental process allows you to start small and then increase your investments over time.
This revised system can give you big gains. Here’s a simple illustration –
- Regular SIP. Say, you invest ₹5,000 every month for the next 20 years. At a CAGR of 12%, you will build a corpus of ₹49,46,000.
- Top-Up SIP. If you increase your SIP amount by 10% every year, you will end up with a corpus of ₹98,45,000. In other words, you can double your wealth with a manageable 10% increase in SIP amount every year
Most mutual fund companies allow top-up facility on their SIP however there is a catch.
Some mutual fund companies require you to opt the top-up facility while setting up the SIP itself. I think this is because of system restrictions in sending feeds to banks for automated bank account debit.
This is not something to worry about. You always retain the option of starting another SIP with the fund incase you did not opt for the top-up facility initially.
Another restriction relates to the amount. Some mutual fund houses insist on a minimum of ₹500 for the top-up or multiples of ₹500 only. Also, some fund houses allow top-ups every 6 months while others allow an annual increase.
In my opinion, the step-up or top-up SIP is a sound wealth building methodology. A mutual fund investor should definitely use this to grow your wealth.
Related: SIP Calculator
Flex SIP or Flexible SIP
A flex SIP is a useful tool for investors whose cashflow is uncertain.
With a flex SIP, you can adjust your SIP instalment per your wishes. And while this is not easy to do and takes away the advantages of a system, having this flexibility is a boon for investors whose inflow is not constant. These would be professionals, freelancers or self-employed
Trigger SIP is a little anti-SIP in its construct. SIP is more of a system which allows for consistent insertion of funds. It helps you invest without worrying about timing the stock markets.
A trigger SIP does just that and also allows you to set either an index level, NAV, date or an event for when the next purchase is triggered. So this can be as simple as invest a certain amount when the Nifty crosses 11,000.
In my opinion, trigger SIPs should be avoided as they are speculative in nature. They go against the fabric of a systematic investment plan.
Further, the use of such facility requires a high degree of financial and stock market awareness. It is definitely not a tool for beginners or passive investors
When setting up an SIP, you will be asked for the tenure in years or months. I usually set-up an SIP for a 10 year period (120 months). However, there is an option for investors to not set an end date to the SIP to make it continue till perpetuity.
The reason for having this perpetual SIP facility is to not allow investors to procrastinate on continuing their investment journey once the existing SIP has finished it’s tenure. This feature treats SIPs as long term investing instruments. Additionally, it is in the fund houses interest to have you continually invest money as they make their fees from the amount of monies they manage.