What are the different types of SIP in India?
Systematic Investment Plan (SIP) is an investment option wherein the investors may regularly invest in a pre-specified mutual fund scheme at periodic intervals. The investments continue to be made irrespective of whether the markets are going up or down. Retail investors continued to invest in mutual funds through SIP, was evident as the monthly SIP inflows in March 2020 have continued to hover above Rs. 8,000 crore mark for the 16th consecutive month. (Dec 2018 – March 2020) Source: Association of Mutual Funds in India
The most significant benefit that the investors get by investing through SIP is that it helps them tide over the fear psychosis, which leads to delayed investments, especially in volatile market condition. The most prominent dilemma investors face while investing is regarding timing the markets. However, one often keeps waiting for the right time to invest and misses the potential upside.
Since the investments are continued to be made across the market movements, the cost of investment gets averaged over time. So, the investor receives a higher number of units when the markets are falling and vice-versa. However, the overall portfolio valuation also rises for investors during such times. With regular investments made over time, SIPs add a sense of financial discipline into the lives of the investors, and they may aim to achieve their financial goals in a time-bound manner.
Besides the regular SIPs, the investors may also opt for five different types of SIP, which are:
Step Up SIP/ Top-Up SIP
It is indeed a fair assumption that the income increases over time, but usually, investments do not. Step Up SIP allows the investors to increase the regular investments as per the specified amount/ percentage.
For example, if the investor invests Rs. 5,000 through SIP for 30 years, the investor may accumulate Rs. 1.76 crores with an investment of Rs. 18 lakh (assuming 12% annualized returns). However, if the SIP amount is increased by 10% per year, i.e., Rs. Five thousand in year 1, Rs. Five thousand five hundred in year 2, Rs. 6,050 in year three and so on, the investment portfolio will swell to Rs. 4.42 crores as against an investment of Rs. 98 lakh over the period with assumed investment returns and period remaining the same.
There might be times when an investor is grappling with cash flow strains temporarily. There might be certain months of low income for the investors. In such situations, the investors may discontinue the SIP. But, instead of stoping the investment, one may opt for Pause SIP to pause the regular investments for a specified period, generally three months. Pause SIP allows the continuation of SIP automatically after the expiry of the specified period.
Flex SIP allows the flexibility to the investors to change the investment amount depending upon the cash flows available. As such, such SIP is suitable for such investors who do not have regular inflows, and the income varies across different months. While one must register the SIP with a fixed amount, such amount may be reduced when the income reduces and may be increased when income increases.
This is one of the intelligent SIP options, wherein the SIP amount is triggered only on specific triggers, like specified percentage movements in index, hitting certain levels, specified NAV, etc. As such, Trigger SIP is suitable for such investors who may gauge the market volatility and want to invest only when their investment criteria are fulfilled.
Perpetual SIP is the SIP option wherein no expiry date is specified. This option is selected only when the investor is aiming to invest without having a specific goal at the time of SIP registration. Subsequently, on the accumulation of the specified amount in the portfolio, the investor may stop further investments and discontinue the perpetual SIP.
The different SIP options are offered to the investors for making the investing process more convenient and flexible.
Disclaimer: The chart/information shared above is for illustrative purposes only and should not be construed as advise. The above is to illustrate the concept of asset allocation. There is also a possibility of the expected event not happening or some other unforeseen event that may affect the future performance of asset class. Investors are requested to note that there are various factors domestic and global that can have impact on performance of the asset class mentioned in the article. Information given is available in public domain.