Yesterday we covered how you can start small and win big by investing in SIP. Today we’re delving just a little deeper so you can better understand the different offerings available to you when it comes to systematic investment plans.
Though SIPs were a pretty straightforward affair when they started being offered a little over 25 years ago, as time went by, customers wanted more flexibility in planning and investing. Mutual fund houses were receptive to what their investors wanted and diversified SIP offerings. Now, there are four broad types of SIP that customers can invest in to make the most of their finances. Let’s go through them together.
1. Perpetual SIP: This may be seen more like a hack than a type of SIP in itself but it’s an interesting one. Normally, when investing in a SIP, you would be asked to enter a start and end date. This pre-decided period of time is basically the tenure of your investment, be it 2 years or 5 years. Once this investment matures, you can then withdraw your money, though it is most common for people to renew their SIP. However, since many investors lose track and don’t renew on time, their saving pattern and the end returns get affected.
To get around this problem, it is now an option to not enter an end date when filling out a SIP mandate, which means you’re signing up for a perpetual SIP with no end date (the fund house works under the assumption that the SIP will continue until 2099 unless they receive communication stating otherwise). That being said, since the whole point of investing in a SIP is to get disciplined and develop good investing habits, we don’t recommend you do this.
2. Flex SIP: This is a popular choice amongst self-employed individuals. Investments in a SIP are made regularly and in a certain amount but a Flex SIP allows you to adjust the instalment amount if your cash flow is unsteady. So, for example, if you got a bonus from work or someone unexpectedly paid you back, you can choose to invest more that month than you do regularly.
3. Trigger SIP: This is not the kind of option that new or beginner investors should choose lightly since it does require some know-how and experience in the market. With this option, you basically set a date, time, Net Asset Value (NAV) or index level that triggers your investment. If it sounds a bit tricky, you’re quite right for thinking so. It is always best to invest in mutual funds in the long terms rather than for short term profit since the latter leaves you at the mercy of market volatility.
4. Top Up SIP: This type of SIP allows you to increase your instalment amount at regular intervals if you so choose. This is a smart option since most people do tend to get raises and spend more as a result; saving and investing a proportionately higher amount then makes a lot of sense. Saving the same amount of money over several years will still show you returns but increasing your investment amount gradually and regularly can result in significantly higher returns once your investment matures.
You even have the option to put a cap on the amount you can top up (just in case you need to have control over how much you increase your instalment amounts) or on the year until which you need the top-up facility (if you know you won’t be investing more than a certain amount past a certain year). You will have to specify needing this option at the time of enrolling and you can top up in multiples of Rs. 500 only. Note that you can’t change the top-up details once you’re signed up so be really sure of this before you sign up for it.
The last one is not a type of SIP but it is an option that is available with certain fund houses only (and if you’d like to have it, then make sure you research well on which fund to invest in). In case of a financial crisis, like a job loss or significant pay cut, you have the option to pause SIP for 1-3 months instead of stopping it. This buys you much needed time to sort out your finances and get back on track. We suggest that you only do this if you’re in severe financial distress since this otherwise breaks your investment cycle and affects the return you can generate.
Remember, though, these SIP options are convenient and offer flexibility, but the point of a SIP is to stay invested for a long time and achieve your financial goals through regular investments. Make sure you do your research and look through all your options well before enrolling for any of the above.