Introduction
Investing in various types of mutual funds (MFs) has become simple, thanks to the flexible Systematic Investment Plan (SIP) option. All you need to do is set a fixed or monthly amount that gets automatically deducted from your bank account.
That's what people usually prefer, a fixed amount every month. Yet, very few know the different types of SIP plans available in the market. And that's what this blog also aims to do.
As you keep reading, explore the types of SIP investment modes present, how they differ from the regular SIP plan, and whether you should go for them or not.
Still relying on your traditional SIP? You might be surprised at what you've been missing!
What Is A Systematic Investment Plan (SIP): Brief Overview
A Systematic Investment Plan (SIP) is a method that allows you to invest a fixed amount regularly in a mutual fund of your preference. It’s among the popular and convenient ways to invest in mutual funds, offering the flexibility to invest in small installments over time rather than a lump sum.
For instance, mutual fund houses (or AMCs) allow you to invest as low as ₹250 per month. However, the minimum SIP amount can vary from one fund to another.
Types Of SIP Plans Available
Depending on the mutual fund type, there can be several ways through which SIP investment can happen. The five major types of SIP investment plans include Regular SIP, Top-up SIP, Flexible SIP, Perpetual SIP, and Trigger SIP. But, there can be more as well, depending on the fund house.
Let us look at each type in detail with an example.
Regular SIP
This is the common type of SIP plan preferred by many investors. Here, you decide on an amount and frequency for a specific period.
Let's say ₹500, and with a bank mandate, you allow monthly deductions from your bank account. And not necessarily monthly – you can choose twice a month, quarterly, monthly, or even annually.
Here, you have the flexibility and option to select the investment period and frequency. However, one must stay consistent and disciplined to accumulate a larger corpus in the long run.
Top-up SIP Investment
Top-up SIP, also known as a Step-up SIP, is an upgraded version of a regular SIP. As the name suggests, it allows you to increase your SIP amount periodically.
For example, if you're investing ₹1,000 per month and choose a 10% top-up, your SIP amount will increase to ₹1,100 in the next cycle.
Key Features:
- All schemes offering SIP facility shall provide a step-up SIP facility.
- It will be offered on an annual basis for monthly and quarterly SIP frequencies.
- Under the top-up plan, the percentage increase will occur in multiples of 5% or ₹500.
- When registering a new SIP via the Step Up plan, a minimum tenure of at least 2 years is required.
- The existing mandate cannot be used for this new plan; a fresh mandate must be created.
- If you wish to cancel the Step up SIP, a request must be submitted at least 7 to 20 days in advance. And it will not cancel the existing SIP. Instead, a new SIP will get created and override the existing one.
This plan works perfectly for those who receive regular salary increments or want to boost their investments gradually. It helps you fulfill your financial goals faster compared to sticking with a fixed SIP amount.
Flexible SIP
The flexible SIP plan allows you to modify the amount and the frequency of investment. In short, you have the flexibility to decide when and how much to invest, unlike regular SIPs. If you wish to make these changes, a prior notice must be sent to the fund house "at least 20 days before the due date."
Things to remember:
- Investors have the right to increase/decrease the SIP installment at any time during the SIP tenure.
- Flexi SIP lets you change your SIP amount each month or quarter (based on your plan). For example, for a monthly flexi-SIP, you can adjust the amount each month, and the same for a quarter as well. However, they must state the desired target value to avail this plan.
- However, you must first check with the fund house and see if they provide this SIP option. Some fund houses may not allow "Daily or Weekly SIP Frequency."
Trigger SIP
The name itself defines that "investment will happen only when a specific event gets triggered." The investor gets an option to decide the trigger event (e.g., when the market falls, place an SIP, etc.). If this event occurs, your SIP amount will be deducted.
Some of the common types of triggers include;
- NAV Appreciation / Depreciation Trigger
- Index Level Appreciation / Depreciation Trigger
- Capital Appreciation / Depreciation
This trigger SIP can only work effectively when you understand how the market operates, enabling you to set the desired triggers and execute your strategies.
(Note: Some mutual funds may not allow a combination of triggers. Also, the trigger execution may fail due to insufficient balance, or units kept under pledge/lien.)
Perpetual SIP
Similar to regular SIPs, but in the Perpetual SIP plan, you have no limit on the investment period. In short, there is no fixed tenure (such as 3 or 5 years) for these SIPs, giving you the advantage of compounding for a longer duration.
For example, a person started a mutual fund SIP of ₹1000 for 4 years in a regular plan. But, in the Perpetual SIP plan, instead of 4 years, one can decide how long this SIP should continue.
These SIPs will continue to occur unless you instruct your fund house to stop them. Likewise, no mention of the SIP end date can make the SIP plan perpetual. However, the notice must be sent to the AMC at least 7 to 15 days before the due installment date.
Multi SIP
Multi-SIP plans let you invest in multiple mutual fund schemes through a single SIP setup.
For instance, if you choose four different schemes under one Multi SIP and set a total investment of ₹3,000, that amount will be automatically split and invested across all four funds.
This makes it easier to diversify your portfolio without the hassle of setting up separate SIPs for each scheme.
Value SIP
Value SIP helps investors to invest in tune with the market fluctuations by adjusting their investment amounts based on market conditions.
For example, you can invest more when the market is undervalued (to buy more units at lower prices) and reduce your investment when the market is overvalued.
This approach allows you to create long-term value in your portfolio by aligning your SIPs with market opportunities.
Checklist Before You Choose Your SIP Type
Before selecting any type of SIP Plan, consider these points to find the right match for your investment.
- Assess your income stability - If you have a regular income, a regular SIP works well. But if your income fluctuates or you expect increments, a Top-up SIP or Flexible SIP might be more suitable.
- Check with the Fund - Many MF houses may not provide a certain type of SIP plan. It is crucial to check the fund house's SIP plans.
- Review the Terms and Conditions - If you plan to proceed with a SIP facility, do read the Terms and Conditions attached to the plan type.
- Understand the flexibility of the SIP plan - Some AMCs may have limits on redemption or step-up function. Hence, look for SIP options that allow pausing, modifying, or stepping up investments as your financial situation evolves.
Conclusion
Mutual funds and SIPs come in handy, and the latter serves as a bridge to facilitate investments in the former. With the recent funds, asset management companies (AMCs) now offer several SIP plans to invest in these MFs.
However, there are certain terms and conditions with each SIP plan type. So, before proceeding with any type, conduct your own research and confirm with the mutual fund house for an informed investment decision.
