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In recent years Systematic Investment Plans (SIPs) have emerged as a popular and effective way to invest in mutual funds. With a sip investment individuals can start small and make fixed, regular contributions to achieve their financial goals over time. But did you know that there are different types of SIPs? That’s right! And we’re not just talking about SIPs associated with types of mutual funds like equity, debt, or hybrid fund SIPs.
Each systematic investment plan we’re going to talk about has its own characteristics and benefits which cater to the diverse needs and preferences of investors. Choosing the SIP that aligns with your goals, risk tolerance, and preference is essential for investing efficiently and stability, but knowing about them is the first step. So what exactly are the different types of SIP plans, and how does one choose the right one to suit their unique financial situation? Well, let’s explore that in depth in this blog.
Types of SIP Plans
Regular SIP
With a regular sip plan, you can invest a fixed amount at regular intervals, like monthly or semi-annually for a specific duration. These investments are automated, meaning the money automatically gets deducted from your linked bank account on predetermined dates. Since you’re committing to a fixed investment, these plans can help you cultivate financial discipline so you can easily meet your target regularly. If you choose a regular SIP, you can set a fixed amount, choose the frequency of contributions, and specify the duration for which you’ll make investments. Once selected, you cannot alter the contribution amount for the investment duration.
Top-up SIP
This SIP is also known as step-up SIP, and it offers a bit more flexibility than regular plans. As your income increases every passing year you would also want to raise the SIP contribution amount. A top-up SIP allows you to do exactly this. With this SIP, you can increase your investment amount periodically, which can also help you keep up with the rate of inflation. This step-up can be either amount-based, such as an increment of Rs. 1,000 every year, or it can be based on percentage, like a top-up of 10% every year. For example, if you invest Rs. 10,000 every month for the first twelve months, you will start investing Rs. 11,000 from the thirteenth month onwards. Because of this incremental structure, a top-up SIP can help you accumulate more wealth than a regular SIP in the same duration.
Also Read: How to Choose the Best SIP Plans? Step-by-Step Guide
Flexible SIP
Flexible SIPs, as the name implies, are extremely flexible and suitable for investors wanting a high degree of adaptability. In a top-up SIP you can only increase the contribution amount, so you are limited to upward adjustments rather than full flexibility to adjust both the amount and frequency of contributions. A flexible SIP solves this issue, as it allows you to change the investment amount as per your financial situation or the market conditions. You simply have to notify the AMC one week before the SIP is deducted from your bank account, and the AMC will make the changes according to your instructions. So if you receive a bonus or are hit with unexpected expenses, you have the flexibility to adapt quickly. You can also pause your SIP without incurring any penalties, which is another big benefit of Flexi Plans.
Perpetual SIP
Perpetual SIPs don’t come with an expiration date. They go on for as long as you want, that is, they can be redeemed at any time of your choice, unlike regular SIPs which have a predefined investment period. When you select a regular SIP and don’t select the investment duration, it becomes perpetual by default. Since it goes on indefinitely, it eliminates the need to manually renew your plan as it does so automatically. Perpetual SIPs are hence suitable for investors with a long-term perspective who don’t want the hassle of renewals.
Trigger SIP
Trigger SIPs are a bit more advanced than the ones listed above, and are only recommended to investors who are experienced and have a deeper understanding of market dynamics. These SIPs allow investors to set specific conditions or ‘triggers’ based on market or fund performance. If these conditions are fulfilled, an action is taken automatically. These triggers are highly customisable such as buying more units in case the NAV of the fund changes or selling units if the market starts to fluctuate. Overall, trigger SIPs are riskier than other SIPs as a high degree of speculation is involved and can be complex for investors just starting their journey.
SIP with Insurance
Investors can get the double benefit of wealth creation and protection by investing in SIPs with insurance. The life cover offered by the AMC may be small initially, but it increases over time. For example, the life cover may be 10 times the SIP amount in the first year, and then increase to 50 times during the second year and 100 times during the third, up to a certain limit.
Multi SIP
Multi SIP is suitable for investors who are looking to invest in multiple mutual fund schemes within the same Asset Management Company (AMC), without having to manage separate SIPs for each scheme. This offers several advantages, the biggest being diversification. By diversifying across funds, you can mitigate the risk while optimising long-term returns. Managing and tracking your investments also becomes a less cumbersome task. Multi SIPs also allow you to work toward multiple financial goals simultaneously.
Also Read: How SIPs Can Help You Build Wealth Over Time
Best Choices to Consider When Choosing SIPs
Before selecting the best sip to invest, we have to consider various factors such as:
Risk tolerance
Mutual funds offer different options tailored to the risk preferences of aggressive, moderate, and conservative investors. But risk tolerance goes beyond just preferences or the investors’ comfort level. It is also influenced by factors such as income, age, goals, and time horizon. For example, an investor with a modest or unstable income would first and foremost look to preserve the value of their money, so they would have a low-risk tolerance.
Similarly, a young investor in their late 20s who is planning for retirement has a higher risk tolerance due to their age. Someone with a longer investment horizon, say needing maturity after 20 years, would also be able to tolerate more risk compared to someone with a shorter horizon, like needing maturity within two years.
Investment goals
Your investment journey is driven by your financial goals, so it’s important to have clear and specific goals in mind before starting. Different SIPs cater to different financial goals, whether it’s funding your child’s education, purchasing a new house, or building an emergency fund. For funding children’s education, investors can opt for SIPs with a long-term horizon and a higher allocation to equity funds. On the other hand, for short-term goals like building an emergency fund, you can look into SIPs with a more conservative approach, such as debt mutual funds SIP as it focuses on capital preservation and liquidity.
Investment horizon
Another factor in determining the most suitable investment schemes is the investment horizon. It refers to the duration for which you want to remain invested. Your investment horizon and goals are also interconnected. Different types of mutual fund schemes are suited for different investment horizons. For example, debt mutual funds invest in short-term securities such as T-bills, commercial papers, and government bonds, and are a good option for an investment horizon between 1 to 3 years.
Expense ratio and fund performance
The expense ratio is the fee charged by the AMC for managing the fund. The lower the expense ratio the better your overall returns will be, but remember your decision shouldn’t be solely based on this factor. It is just one factor to consider among many such as the fund’s past performance, the fund manager’s expertise and experience, and various risk-adjusted ratios.
When you are analysing the fund’s performance, your focus shouldn’t be just on the performance in the previous year. Instead, you should assess the fund’s performance over longer periods, such as 3, 5, and 7 years. A long-term analysis gives you insights into the fund’s consistency and its ability to deliver returns across different market conditions.
Similarly, you should familiarise yourself with the fund manager’s style of investing and philosophy. See how consistent their performance has been over different market cycles and how they manage risk. You should also analyse various risk-adjusted ratios, such as the Sharpe ratio, Treynor ratio, and Sortino ratio. These ratios measure the fund’s risk-adjusted returns, meaning they provide a more comprehensive view of the fund’s performance relative to its level of risk.
SIP frequency and flexibility
Frequency refers to how often you invest, and with SIPs, you have the option to choose from various intervals such as monthly, quarterly, or semi-annually. Monthly SIPs are the most popular choice since most of us receive monthly salaries or income. However, options like daily and weekly SIPs exist. These shorter intervals are not recommended though due to complex taxation calculations and tedious record-keeping.
Flexibility is another key advantage of SIPs. You have the freedom to adjust the investment amount based on changes in your financial situation. This feature works especially well for people with irregular income streams, such as those in business or freelancing. With flexible SIP plans, you can pause or modify your investments as needed. Should you face unexpected expenses, you can simply pause your SIP and focus on the emergency without straining your budget.
Conclusion
There are good reasons why SIPs are getting more and more popular in India. Not only do they offer investors the convenience and accessibility to start small or the flexibility to alter their investment commitments, but they also benefit from rupee cost averaging and compounding interest. With rupee cost averaging, the need to time the market is eliminated as investors consistently invest fixed amounts at regular intervals, regardless of market fluctuations.
Essentially, the unit price of the investment averages out as more units are bought when the price is low and fewer when the prices are high. Thus the risk associated with timing the market is reduced quite a bit. The power of compounding interest, on the other hand, gives you interest on interest earned which helps create a snowball effect resulting in exponential growth of your wealth over time.
Now that you are aware of the different types of SIP available, you can choose the most suitable ones by assessing your financial goals, risk tolerance, and investment horizon, and evaluating the features and benefits of each SIP type. Since SIPs are usually long-term commitments, it’s better to pick the right ones from the start. A financial advisor can help you effectively assess not just your personal financial situation but also factors associated with mutual fund schemes such as risks, returns, past performances, fund managers’ expertise, risk-adjusted ratios, and so on. With this guidance, you’ll be able to make well-informed decisions and select the right SIPs. And remember, SIPs thrive over the long term, so don’t delay and start your SIP journey today!
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