Investing in mutual funds is a great way to grow wealth and secure your financial future without constantly monitoring the market. Based on your goals and interest, you can invest in MF in two ways- lump sum and systematic investment plan (SIP).
While both methods have their own pros and cons, most investors prefer SIP as it allows them to grow their wealth and minimise the impact of market volatility. The best part? There are seven types of SIP funds that you can choose from. Each has its own unique features and benefits that help you maximise the return potential based on your investment goals and risk appetite.
In this blog, we'll explore the different types of SIPs to help you select the best option.
Regular SIP is the most popular method of SIP with a fixed monthly investment amount and tenure. This approach eliminates the need to time the market by spreading your investments over the tenure. It also helps you ride market volatility through rupee cost averaging.
Regular SIP is suitable if you have a disciplined investment approach. It allows you to invest as little as Rs. 500 every month and build wealth over time.
Unlike salaried individuals, who get their fixed income at the beginning of the month, a businessperson might not have that liberty. They may receive a chunk of money in the middle of the month or a few times a year. In such situations, Flexible SIP is the best option. This type of SIP mutual funds allows investors to increase or decrease the investment amount or pause the SIP for a few months based on their financial circumstances and income flow.
Flexible SIP can be a good option if you are a businessperson or have an unpredictable income source. It is also beneficial if you prefer to buy aggressively in the bearish phase and reduce investments in the bullish phase of the market.
While it is similar to regular SIP, their difference lies in the investment amount. In top-up SIP, your investment amount increases every year. Let’s understand this with an example.
Suppose you opted for a top-up SIP with an initial amount of Rs. 1000 and want to increase your contribution by Rs. 500 yearly. So, if your SIP amount is Rs. 1000 in the first year, it will become Rs. 1,500 in the second year, Rs. 2,000 in the third year, and so on until the tenure ends.
Among all the SIP investment types, the top-up option is highly recommended by financial experts, especially if you are a salaried employee at the beginning of your career. With a top-up SIP, you can gradually increase your investment, generating potentially higher returns than the traditional approach.
Trigger SIP allows you to automate investment decisions based on pre-defined conditions or market triggers. You can set conditions based on the security price, stock market performance, etc., to execute the investment instruction. Let’s understand this with an example.
Suppose the NAV of your desired mutual fund is Rs. 10. But you want to start the SIP of Rs. 5,000 only if the NAV falls to Rs. 6. Here, you can set a trigger SIP order. When the NAV reaches or falls below 6, the order will be activated. This means Rs. 5,000 will be automatically deducted from your linked account to buy the mutual fund units.
Trigger SIP requires a firm grasp of the financial markets. Therefore, it is recommended only if you have properly analysed the trends and are well-versed in its technical and fundamental aspects.
Perpetual SIP is quite similar to regular SIP. The only difference is that perpetual SIP has no pre-determined investment tenure. It has a fixed monthly investment amount, but the tenure continues indefinitely. You must manually inform the fund house to stop a perpetual SIP. This helps you stay invested in the market for an extended period and achieve long-term goals like retirement planning, children’s education, etc.
Perpetual SIP is a good option if you plan to invest for a longer time frame and leverage the power of compounding to maximise returns.
As the name suggests, multi-SIP enables you to invest in multiple schemes the fund house offers. It is a great way to diversify your portfolio and mitigate risk by spreading your investment across mutual fund schemes.
For example, if your monthly investment amount is Rs. 4000 and you have opted for multi-SIP with four different funds of an AMC, each fund will get credited by Rs. 1000 per month.
Multi SIP is perfect if you are seeking a diversified portfolio. It helps you minimise the impact of a poorly performing security on your overall investment.
Certain fund houses offer a combined benefit of SIP and insurance if you invest in equity mutual funds for a long term. The insurance coverage is typically 10x your initial SIP and gradually increases over time. The fund house often bears the cost of investment, as their strategy is to extend your SIP tenure and keep you invested for a longer period.
Opting for a SIP with insurance is an entirely personal choice. You can opt for it if you don’t have insurance coverage or have a low-risk appetite.
A Step-Up SIP allows investors to increase their monthly investment amount by a fixed percentage annually. This helps align investments with growing income, gradually building a larger corpus over time. Ideal for long-term goals, it offers a flexible way to enhance savings systematically, ensuring investments grow in line with financial capacity.
Equity SIPs involve investing in equity mutual funds at regular intervals. This systematic approach helps mitigate market volatility by averaging out purchase costs over time. Equity SIPs are suitable for long-term wealth creation, offering the potential for better returns compared to traditional savings options while benefiting from the power of compounding.
Debt SIPs focus on investing in debt mutual funds, which primarily invest in fixed-income securities like bonds and government securities. These SIPs provide regular, stable returns with lower risk than equity SIPs. They are ideal for conservative investors looking for a steady income and capital preservation over the long term.
Tax-saving SIPs invest in Equity-Linked Savings Schemes, which offer tax deductions under Section 80C of the Income Tax Act. These SIPs provide the potential for capital appreciation and help reduce taxable income. With a lock-in period of three years, they combine the benefits of tax savings and equity investment growth.
Choosing the best SIP depends on various factors. Here are some critical considerations for the investors:
1. Investment goals
Identify your financial objectives, like retirement planning, children's education, or buying a home. Aligning your SIP with specific goals ensures a disciplined investment approach, making it easier to track progress and adjust as needed.
2. Risk appetite
Assess your risk tolerance before selecting a SIP. If you have a greater risk appetite, consider SIPs that invest in equity mutual funds, providing the possibility for significant returns but come with increased volatility. For conservative investors, debt-oriented SIPs provide stable returns with lower risk.
3. Investment horizon
The duration of your investment plays an important role in determining the best SIP. Long-term SIPs in equity funds can leverage compounding benefits and ride out market volatility. Short-term goals require less risky, more stable investment options like debt or balanced funds.
4. Past performance and fund management
Examine the historical performance of the mutual funds associated with the SIP. Consistently performing funds managed by experienced fund managers are generally safer bets. Tools like SIP calculators can help estimate future returns based on past performance.
The best SIP for you will depend on your specific financial goals, risk tolerance, and investment timeline.
There is no one-size-fits-all in investing. Your approach entirely depends on your financial goals, income flow, and risk appetite.
Additionally, consider starting with small, manageable amounts to gain confidence and understanding of how SIPs work. Utilise online tools and calculators to project potential returns and make informed decisions. It's also important to stay abreast with market trends and regularly review your investment portfolio. This will help you make necessary adjustments to optimise returns. Diversification is another key strategy to manage risk effectively. By spreading investments across diverse asset classes, you can protect your portfolio from market volatility. Keep in mind that investing is a journey, and staying well-informed and adaptable is key to achieving your financial aspirations and fulfilling your dreams.
Moneyfy is a one-stop platform for you to invest in mutual funds, FDs, insurance plans, and pension schemes. With the SIP calculator available on the Moneyfy website, you can easily plan your investments based on your financial goals. Visit the Moneyfy website, register, and start investing today.
A SIP enables you to invest a specified amount in a mutual fund scheme at regular intervals, typically every month. The specified amount is automatically debited from your bank account and invested in your selected mutual fund. This helps in rupee cost averaging and compounding returns over time.
A SIP account is an investment account used for systematic investments in mutual funds. It facilitates regular contributions to a chosen mutual fund scheme, enabling disciplined investing and helping to build wealth over time.
To make an online SIP investment, choose a mutual fund platform, register by providing your details, and complete the KYC process. Select the mutual fund scheme, set the SIP amount and frequency, and link your bank account for automatic deductions.
Yes, you can increase your SIP amount later. This is known as a top-up or step-up SIP, where you can periodically increase your investment amount to match your growing income. This helps accelerate wealth accumulation and achieve financial goals faster.
A SIP involves investing a fixed amount regularly, while a Flexi SIP offers the flexibility to change the investment amount based on market conditions or personal financial situations. Flexi SIPs allow you to increase or decrease contributions, providing more control over your investments.
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14 November 2024
9 mins read
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