Systematic Investment Plan: Investors always seek and prefer to make an investment that gives the highest return while they are in their comfort zone. A Mutual fund has evolved as a platform that provides good growth and the potential to ensure one’s financial security.

Define a systematic investment plan

SIP or systematic investment plan is a simple investment strategy in a disciplined manner aiming for wealth accumulation over a period to meet financial goals. It is a method of investing a specific amount towards one mutual fund scheme at regular intervals, say weekly, monthly, or quarterly, for a long-term period.

Being flexible in nature, the investors can increase or decrease the periodical installment or else can stop SIP whenever required. It proves to be the easiest way of investment compared to lump sum investment. In lump sum investment, you need to engage a bulk amount in one shot.

Why should you prefer investing in SIP?

Investing through SIP in a mutual fund is a key solution to enjoy incessantly the high returns on investment. It also makes a great sense of investing irrespective of market jittery.

1. Hassle-free investment: Assistance from fund managers is a key advantage to invest in a mutual fund. They regularly carry out extensive research before investing in various stocks or instruments, which can be a tough task on the investor’s part individually. Investors occupied in regular jobs and running businesses are too busy to devote sufficient time and put efforts to keep tracking the market regularly. It requires a good focus to select equity funds that fall in line with the investment objective.

2. Diversification: A diversified portfolio reduces risk levels. Investing across multiple funds is always a better suggestion compared to investing in a single fund. For instance, if you invest your total corpus in a single scheme only, and when the market tanks, you may suffer huge losses in case that specific scheme fails to sustain. However, when you diversify your total corpus in different segments, during the market meltdown, the loss from one scheme can be covered from other scheme’s profit.

3. Capital appreciation: Assistance from fund managers is a key advantage to invest in a mutual fund. They regularly carry out extensive researches before investing in various stocks or instruments, which can be a tough task on the investor’s part individually. Investors occupied in regular jobs and running businesses are too busy to devote sufficient time and put efforts to keep tracking the market regularly. It requires a good focus to select equity funds that fall in line with the investment objectives.

4. Well-regulated and transparent: Both, Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI) regulate a mutual fund industry. They provide periodic guidelines following which ensures smooth and transparent functioning of mutual fund industry.

5. Start with a small amount: You can start SIP with a small amount of Rs. 500 or even less. Thus, it never appears as a burden and you can invest systematically for a long period with ease.

6. Encourages discipline: Keeping aside a lump sum amount in one shot is a bit tough than deducting small amounts on a regular basis from your incomes. Often, the lump sum amount kept aside with an investment purpose ends up abruptly by using the amount for other reasons. An SIP works on a regularly investing pattern. Thus, helping investors to stay focused to achieve their financial goals in the long run.

7. Rupee-cost averaging: You cannot time the market. Hence, it is difficult to fix a particular time for making an investment. Rupee-cost averaging helps the investors to keep accumulating wealth even when the market tanks. For instance, if the market is high, you get fewer units but when the market is low, you benefit accumulating more units for the same amount. Suppose you started investing Rs. 500 monthly from March 2019 to February 2020.

8. Power of compounding: You earn returns on the investment made in SIP. All these returns accumulate over a period. The longer the period, the higher will be the interest. This means you again earn returns on the accumulated returns. Thus, investing at an early stage and for a longer period is beneficial to accumulate wealth with the power of compounding.

9. Convenience: No manual efforts are required to pay an amount on decided dates. You can provide ECS instruction or post dated cheque and the units will auto credit to your account on time.

10. No extra charges: There is no such extra charge needed to be paid while investing in SIP through monthly mode.

11. Acts as an emergency fund: You can withdraw SIP anytime in case of any emergency. However, it is advisable to invest in debt or liquid fund for a short-term and in equity funds for a long-term.

The below chart can help you decide the right category for your SIP.

MUTUAL FUND CATEGORY SELECTION

There are around 5 primary types of SIPs that you can invest in - regular SIP, flexible SIP, top-up SIP, trigger SIP, and perpetual SIP. Let’s take a more in depth look at each type and get to know them better. 

1. Regular SIP: As the name itself signifies, a regular SIP is the most simplest form of a Systematic Investment Plan. Under this plan, you’re required to make contributions at regular intervals, which can be monthly, bi-monthly, quarterly, or half-yearly. The contributions that you make are then invested in mutual funds of your choice. When you open this SIP online, you’re given the option to choose the tenure, the contribution amount, and the frequency. However, once you’ve chosen the contribution amount, you cannot change it at a later point in time.    

When to choose this type of SIP?

If you’re just starting out on your stock market journey, you can opt to invest in a regular SIP. Alternatively, if you’re clear with your investment tenure and your financial goals, opting to invest in such an SIP may just be the perfect choice.

2. Flexible SIP: Also known as flexi SIP, a flexible Systematic Investment Plan is very similar to a regular SIP. However, the only difference between the two is with the investment amount. In a flexi plan, you can adjust or change the amount of contribution that you wish to make towards it at any point in time. By allowing you to change the investment amount, flexi SIPs give you a greater degree of control over your investments than a regular plan. 

When to choose this type of SIP? 

If you prefer to have a greater control over the SIP by being able to adjust your investment in accordance with the market movement, then investing in a flexible SIP may just be a good idea. For instance, you can increase your contribution when the markets are performing well and decrease it when the markets are falling. Alternatively, if you don’t have a steady source of income or are prone to financial crunches from time to time, then a flexible SIP may just be the perfect option for you. It allows you to lower or increase the amount depending on your current financial situation. 

3. Top-up SIP: Also known as step-up SIP, this type of a Systematic Investment Plan allows you to increase your contributions at certain predetermined intervals.  For instance, with a top-up SIP, you can start by investing Rs. 5,000 each month and put in an instruction to the fund house to increase the amount of contribution by Rs. 1,000 every six months till the end of the tenure. So, in the first six months of the SIP, you will be contributing Rs. 5,000 each month and for the next six months, you will be contributing Rs. 6,000 every month. This goes on till the end of the SIP tenure. 

When to choose this type of SIP?  

A top-up SIP is the perfect option for salaried individuals getting regular yearly or half-yearly increments. This allows you to automatically increase the SIP contributions in line with your salary hike without you having to manually intervene in any way. 

Also, step-up Systematic Investment Plans may be a good option for individuals who have just started working as well. You could start with a small investment amount and increase it slowly every single year as and when you receive an increment.

4. Trigger SIP   

A trigger Systematic Investment Plans only invest in a mutual fund online if a designated event occurs. This designated event can be anything from favourable market movements, an index level, or even an NAV level. For instance, you could set up a trigger SIP to start investing only if the NAV level of a mutual fund falls below a particular level.

When to choose this type of SIP?   

Trigger SIPs require exceptional levels of market awareness and knowledge on market dynamics. Therefore, you should opt for this kind of Systematic Investment Plans only when you’ve gained enough knowledge and expertise on the stock market.  

5. Perpetual SIP 

As the name itself signifies, a perpetual SIP has no fixed tenure at all. The investment plan continues as long as the individual keeps contributing at regular intervals. It only ceases when the investor provides a stop instruction to the fund house. Apart from this single point, there’s not much of a difference between perpetual SIP and a regular plan. 

When to choose this type of SIP?

If as an investor, you don’t have any specific goal or tenure in mind, choosing a perpetual SIP may be the right choice. It allows you to stay invested as long as you wish and gives you the power to redeem your investments when you see fit.