Mutual Funds have become omnipresent in today’s financial world. Anyone and everyone are talking about them. No wonder that in the last decade, the Indian Mutual Fund industry has recorded an annual average growth of 12.5%. This is far ahead of the global performance and more than double the growth shown by developed countries. (Based on a report by AMFI and Crisil).
One term that has become synonymous with Mutual Funds is SIPs or Systematic Investment Plans. In this article, we will enlighten you about the different types of SIPs that are available. This information will help you select the right plan for your needs.
The easiest way of defining SIP meaning is that it is a mode of investment provided by Mutual Funds. In SIP an individual can invest a pre-determined (and fixed) sum in a mutual fund scheme at a particular interval. The frequency of such investment could be quarterly, monthly or even weekly. In principle, it can be compared to term investment such as Recurring Deposits.
Why should you go with SIPs?
Systematic Investment Plan or SIPs have gained massive popularity in recent years. As per the AMFI (Association of Mutual Funds of India), the national SIP contribution has moved up by 111% in just two financial years (43,921 crores in FY17 to 92,693 crores in FY19). On an average, 9.34 lakh SIP accounts have been added each month in this financial year.
But ever wondered what makes SIP so popular? These are the reasons:
SIPs bring with themselves a sense of financial discipline. It deters individuals from impulse purchases or ad-hoc expenditure, as a fixed sum of money needs to be saved and invested in SIPs.
One can invest as little as Rs. 500 each month in SIPs. Also, the periodicity of the SIPs can be decided by the investor as per his or her preference.
Ease of investment
Making SIP investments is an easy and hassle-free process. Once the one-time mandate is successfully approved, the SIP amount gets automatically deducted from the bank account as per the periodicity of the scheme.
No need for market analysis
Many times investors remain in a dilemma if it is a good time to invest or not. The constant market analysis not only consumes time and effort but also leads to delay in financial planning. SIPs take care of this as they invest across various market cycles.
Rupee Cost Averaging
As SIPs invest across multiple market cycles, they help to average out the purchase cost and optimize the yield.
If started early and continued for a long period of time, investors get rewarded with compounded returns.
In case of equity mutual funds, SIPs are a better way to invest (risk-wise) as compared to a lump-sum payment. As equity markets are more dynamic and volatile in nature, SIPs tend to minimize the risk quotient to a certain extent
Different types of SIPs available in Indian markets
Top-Up SIPs meansthe investors can make the most out of well-performing mutual fund schemes.
Imagine that you get your annual appraisal and the hike is more than you had imagined. How can you invest the additional corpus? Why bother looking at other options, if your current mutual fund is performing well?
Top-Up SIPs can be your answer in these situations. These plans allow the investors to increase their contribution amount at periodic intervals. This flexibility is highly beneficial for investors to park additional funds whenever the scheme performs well and as their income levels go up. Top-Up SIPs also take care of another important factor – decrease in money’s value due to time and inflation.
Also known as “Step-Up” SIPs, investors can increase their periodic contributions in multiples of Rs. 500 in these plans.
Flexible SIPs means that they do not bind the investor with an obligation to pay a fixed sum of money towards the mutual fund scheme. Rather one can contribute basis their cash flow availability at the time of payment.
In case there are some unexpected money outflows in a particular period or there is a cash crunch, one can opt to skip the SIP installment. Similarly, if there is some extra income, one can increase their contribution. However, financial experts suggest that one should not use perpetual SIPs as a way to fund impulse purchases and skip investments. It should be judiciously only when there is a real cash crunch or financial emergency.
Many times, Top-Up SIPs and Flexible SIPs are wrongly used interchangeably, as both options allow the investors to vary their fund contribution. While Top-Up SIPs permit the investor to increase their contribution, with Flexible SIPs one can increase or decrease the fund contribution.
As the name suggests, these plans have an aspect of perpetuity. Perpetual SIPs means do not have any end date prescribed by the AMC and can be continued at the discretion of the investor.
Usually when starting a SIP, investor needs to specify the maturity date. If that is not done, then it becomes a perpetual SIP. These plans enable the investor to observe the market and maximize their gains when things are going well. Also, one can time their exit depending on the market fluctuations.
Generally, Perpetual SIPs are not recommended for beginners. This is due to the fact that having a maturity date in sight brings financial discipline. It also encourages a goal-based approach which in the long-run leads to financial satisfaction. Hence, veteran investors or those who are financially very disciplined can make the most out of Perpetual SIPs.
Trigger SIPs means they are perfect for investors to understand the market working very well and can correctly time their buying and selling decisions. These plans allow the investor to start, redeem or switch the SIP on the happening of a particular event. The triggers could be the market or fund’s NAV reaching a certain level or benchmark.
As the basic premise of trigger SIPs is speculation, most market experts do not advise investors to go with this option.
Now that you are equipped with all the required information, just go ahead and choose the plan that is perfect for you and your financial goals. Happy investing!