Types of SIPs (Systematic Investment Plans) – Which one to Pick?

Systematic Investment Plans have gained popularity owing to their multifaceted attributes like the power of compounding, the benefit of rupee cost averaging, and the potential to give risk-adjusted returns. Instead of lumpsum investment during market highs or lows, SIPs allow investors to invest throughout the business cycle and evenly distribute the cost. Moreover, it balances out the risks and generates good returns in the long term. An added advantage is that SIPs are flexible, you can stop them anytime you want, you can also skip the payments, in case of emergencies. Some SIPs also let you change the amount for installments. This article highlights the various types of SIPs that investors should know and plan their investment portfolio accordingly.

What are the Different Types of SIPs?

SIPs are a mode of payment in mutual funds that lets the investors spread the cost throughout their investment horizon. SIPs can be classified as per the investment objective and fund allocation as well as installment type. Explained below are the different types of SIPs:

A. According to Investment Objective

SIPs are basically mutual funds with a periodic mode of payment and these funds can be equity-oriented, debt-focussed, or balanced/hybrid mutual funds. They are categorized on the basis of asset allocation. Equity funds aim at high-risk high returns whereas debt funds offer stability with relatively low returns. Hybrid funds seek to offer moderate risk and lesser volatility than equity-based SIPs but more than that of debt SIPs.

Apart from these, some SIPs can be used as tax-saving tools or insurance policies such as ELSS (Equity Linked Savings Scheme) and ULIPs (Unit Linked Saving Schemes). Both are tax-exempt under Section 80C of the Income Tax Act. ELSS is equity-oriented whereas ULIP is an insurance-cum-investment product.

B. Based on Installment Flexibility

SIPs offer a regular mode of installment payments where you can fix a minimum amount for SIP to invest consistently and develop that discipline. You can also change the amount if you wish to, by increasing or decreasing the SIP amount. Based on this, SIPs can be of various types as mentioned below:

1. Regular SIPs

In this kind of SIP, investors fix an amount for installments and keep paying it. They give standing instructions to the bank or enable electronic transfer of funds from the bank to the SIP account. It is a hassle-free process because the regular intervention is not required and there is an equal amount invested during market jumps and dives. This averages out the cost of the SIP units purchased.

2. Flexible SIP

As the name suggests, it offers the flexibility to change the SIP amount as per requirement. You can invest more when the markets are down to buy more units and vice-versa. There is a pre-decided formula that enables investors to invest more when markets fall and decrease the SIP amount when markets get expensive.

Just like market conditions, you can also alter the installment amount according to your financial condition. When going through financial crunches, you can lower the amount and increase it when you are doing fine or having a surplus. In this case, intimate the fund house at least a week before the deduction date for any changes. You can also temporarily stop the SIP without being the defaulter and informing the fundhouse when going through an extreme cash crunch. This is also called Flexi-Sip or Flex-SIP.

3. Step-up SIP

Also known as Top-up SIP, this kind of plan will enable investors to increase or step up the SIP amount at regular intervals. You can start the SIP with a fixed amount and opt for a regular top-up on it. For instance, you start a monthly SIP with Rs. 5000 and you can ask the fund house to increase it by Rs. 1,000 every 12 months. This is good for salaried people expecting annual increments or receiving bonuses. You can gradually increase your recurring contributions to the SIP with increased cash flow and accumulate wealth corpus by parking more money.

4. Perpetual SIP

Most SIPs require the investors to declare the tenure they wish to stay invested, like for 3 years or 5 years or more. However, perpetual SIPs will require you to mention the start date and not the end date or tenure for the SIP. In fact, when the investors do not mention the maturity tenor, it is considered to be a perpetual SIP. This means the SIP will continue as long as the investor does not request the fund house or the Asset Management Company (AMC) to stop the SIP. If the investor wishes not to limit the contribution to the SIP within the maturity date and continue for a longer duration, then they can voluntarily opt for perpetual SIPs. They can skip the end date in the SIP form and redeem the plan whenever they want.

5. Trigger SIP

As it indicates, in this type of SIP, investors get to trigger a SIP investment owing to some event like a sudden market dip or a favorable market condition, a specific index level, pre-decided NAV (Net Asset Value) of the units, or so. You can trigger the investment either by starting the SIP, redeeming the units, or switching to another plan. This is advisable for experienced investors who can predict the market movements and have the expertise to set such triggers for selected events. It is majorly based on speculations and therefore, one must have sound knowledge and experience of the markets. You can set triggers effectively if you understand the market dynamics and know when to buy or sell the units of the SIP.

6. Multi SIP

This allows investors to invest in multiple funds of a fundhouse through one SIP. For example, if you invest Rs. 2,000 monthly in a multi SIP, it may split it into 4 schemes buying units of Rs. 500 in each. This reduces the paperwork or managing multiple SIPs at a time where you can invest in one SIP that automatically invests your money into multi-schemes. This adds to the diversification of your investment portfolio. Investors can invest in multi-SIP through Paytm Money where they can add multiple SIPs under a mutual fund scheme. Log in to your account, go to your investments under portfolio sections and you can add multiple SIP and manage them.

Which Type of SIP should Investors Pick?

All types of SIPs come with their pros and cons but it is mainly the investor that decides which type of SIP to go for. For instance, investors looking for mutual funds or SIPs that can offer tax benefits can invest in ELSS. Likewise, if you want to keep increasing the SIP amount at regular intervals without much intervention, you can go for Top-up SIP and give a mandate to the fundhouse. Investors should check the following factors before choosing the type of SIP:

  • Investors should compare their own investment goals with that of the SIP
  • They should also compare the risk parameters of the SIP with their own risk appetite
  • Check the maturity tenure of the SIP if investors are willing to invest for that duration
  • Check the performance and track record of the SIP
  • Plan which type of SIP suits your financial position and cash flows and choose accordingly

Wrapping it up:

SIPs are a rewarding investment avenue that gives an opportunity to investors to create wealth in the long run. SIPs can allocate a majority of the corpus to a particular asset class and can be defined as per the asset allocation. They can be equity SIPs or debt or hybrid ones. SIPs are usually beneficial in the case of equity funds. Likewise, SIPs can also be classified as per the investment objective, for example, wealth creation, investment plus insurance, or tax-savers. The most important classification depends on the type of payments one can do through SIPs. Investors should choose the type of SIPs that matches their investment goals and horizon.

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