Systematic Investment Plans (SIPs) are a popular way to invest in mutual funds. They provide a structured approach to achieving financial goals more effectively. By starting with small amounts, SIPs allow you to benefit from rupee cost averaging, making it easier to build wealth over time.
There are different types of SIPs available, each catering to specific investment needs. A flexible SIP, for example, is great for those with irregular income, such as freelancers. It allows investors to pause, resume, or adjust their contributions as needed. Additionally, a trigger SIP offers the advantage of strategic investing by setting specific conditions for investments, giving investors more control over their financial growth.
What are the different types of SIPs?
Various SIP types are available for investment, including regular SIP, flexible SIP, top-up SIP, trigger SIP, and perpetual SIP. Let's delve deeper into each variant to gain a comprehensive understanding of their features and benefits.
1. Regular SIP
In a regular SIP, investors contribute fixed amounts at regular intervals, typically monthly. This type of SIP allows investors to automate their investments and benefit from the power of compounding over time.
2. Top-up SIP
Top-up SIPs enable investors to increase their investment amounts periodically. Investors can choose to increase their SIP contributions at predefined intervals, allowing them to accelerate wealth accumulation as their financial capacity grows.
3. Flexible SIP
Flexible SIPs offer investors the flexibility to adjust their investment amounts and intervals based on changing financial circumstances. These SIP types allow investors to increase, decrease, or pause their SIP contributions as per their convenience.
4. Trigger SIP
Trigger SIPs allow investors to set predefined triggers based on market conditions or fund performance. Investors can automate their investment decisions by triggering SIPs to start, stop, or increase based on specific market parameters.
5. Perpetual SIP
Perpetual SIPs continue indefinitely until the investor chooses to stop or modify them. Unlike regular SIPs, which have predefined durations, perpetual SIPs offer investors the convenience of ongoing investments without the need for manual renewal. It is important to note that the National Automated Clearing House (NACH) has introduced a maximum duration of 30 years for setting up mutual fund SIPs from the issuance date. Additionally, it is now mandatory to specify the final collection date (end date) of the mandate. Unlike before, perpetual SIPs will no longer have an indefinite end date. These changes were in effect from October 1, 2023.
6. Multi SIP
Multi SIPs enable investors to diversify their investments across multiple mutual funds or asset classes within a single SIP. These SIP types allow investors to spread their risk and optimise returns by investing in a portfolio of funds simultaneously.
7. Step-up SIP
Step-up SIP refers to a systematic investment plan where the investment amount increases at regular intervals over time. In these types of SIP investments, investors have the flexibility to incrementally raise their SIP contributions periodically, allowing for accelerated wealth accumulation.
8. Equity SIP
Equity SIP involves investing in equity mutual funds through a systematic investment plan. These funds primarily invest in stocks, offering the potential for higher returns over the long term. Equity SIPs are suitable for investors seeking capital appreciation and willing to tolerate market volatility.
9. Debt SIP
Debt SIP entails investing in debt mutual funds through a systematic investment plan. These funds primarily invest in fixed-income securities such as bonds and government securities, offering relatively stable returns. Debt SIPs are suitable for investors seeking income generation and capital preservation with lower risk.
10. Tax-saving SIP
Tax-saving SIP, also known as ELSS (Equity Linked Savings Scheme) SIP, allows investors to invest in equity mutual funds while also availing tax benefits under Section 80C of the Income Tax Act. These SIPs have a lock-in period of three years and offer the dual benefit of tax savings and potential wealth accumulation through equity investments.
How do SIPs work?
Systematic Investment Plans (SIPs) function by enabling investors to contribute fixed amounts at regular intervals into mutual funds. This approach allows investors to steadily build their investment portfolio over time. Each SIP instalment purchases units of the chosen mutual fund at prevailing market rates, irrespective of market fluctuations. By consistently investing small amounts, investors benefit from rupee-cost averaging, where they acquire more units when prices are low and fewer units when prices are high. SIPs offer a disciplined and convenient way to invest in mutual funds, encouraging long-term wealth creation through regular contributions.
Benefits of investing in SIPs
Let us look at the benefits of investing in SIP:
- Disciplined investing: SIPs promote disciplined investing by allowing investors to contribute fixed amounts at regular intervals, instilling a savings habit.
- Rupee-cost averaging: SIPs mitigate the impact of market volatility through rupee-cost averaging, allowing investors to buy more units when prices are low and fewer units when prices are high.
- Convenience: SIPs offer convenience, as investors can automate their investment process, eliminating the need for frequent monitoring and manual intervention.
- Flexibility: SIPs provide flexibility, allowing investors to start with small amounts and increase their investment gradually as their financial situation improves.
- Power of compounding: SIPs harness the power of compounding, where reinvested dividends or returns generate further earnings, amplifying wealth accumulation over time.
- Diversification: SIPs enable investors to diversify their investment portfolio by spreading investments across various mutual funds or asset classes, reducing overall risk.
- Cost-effective: SIPs are cost-effective, as mutual funds typically have lower expense ratios compared to other investment avenues, resulting in reduced overall investment costs.
Which is the best type of SIP?
Determining the best SIP type depends on individual investment objectives, risk tolerance, and financial goals. Equity SIPs are suitable for investors seeking higher returns over the long term and are willing to tolerate market volatility. Debt SIPs, on the other hand, are ideal for those prioritising capital preservation and seeking stable income streams. Tax-saving SIPs, such as ELSS SIPs, offer tax benefits under Section 80C of the Income Tax Act, making them advantageous for investors looking to save on taxes while also aiming for wealth accumulation through equity investments. Ultimately, the best type of SIP is one that aligns with the investor's financial objectives and risk profile.
Which type of sip should you select and how?
The choice of SIP depends on investors' financial goals, risk tolerance, and investment preferences. Investors should assess their investment objectives, time horizon, and liquidity requirements before selecting the appropriate type of SIP. Those seeking a disciplined approach may opt for regular SIPs, while investors looking for flexibility may prefer flexible SIPs or top-up SIPs.
Here is a comparison between two types of SIPs – regular SIP and top-up SIP.
Let’s say an investor wants to accumulate a corpus of Rs. 15 lakh in 10 years. They have the option to invest in a regular SIP or a top-up SIP. Let us compare the returns and investment amount required for each option:
Regular SIP
- Investment: Rs. 5,000 per month
- Tenure: 10 years (120 months)
- Total Investment: Rs. 6,00,000 (5,000 per month x 120 months)
- Expected Return: 12% per annum (This is an assumption, and actual returns could vary)
- Expected Maturity Corpus: Rs. 11,61,695 (This is an estimation based on the assumed return rate)
Top-up SIP
- Investment: Starting at Rs. 5,000 per month, with an annual increase of 10%
- Tenure: 10 years (120 months)
- Total Investment: Rs. 9,56,245 (This will be higher than a regular SIP due to the annual increase)
- Expected Return: 12% per annum (This is an assumption, and actual returns could vary)
- Expected Maturity Corpus: Rs. 16,87,163 (This will be higher than a regular SIP due to the increased investment amount)
As you can see, the top-up SIP offers a potentially higher maturity corpus due to the increased investment over time. However, it also requires a larger total investment. The right choice for an investor depends on their individual financial goals and risk tolerance.
Compare Regular SIP Vs Step Up SIP
If an investor invests Rs. 3,000 monthly in a regular SIP for a duration of 10 years at 12% per annum, that investor's total return will be approximately Rs. 3,37,017. However with Step up SIP, at the same amount, rate of interest and number of years, his return will be 4,38,551. You can find a detailed view in the table below:
Particulars |
Regular SIP |
Step up SIP |
Monthly SIP amount |
3000 |
3000 |
Duration |
10 years |
10 years |
Annual returns |
12% |
12% |
Total Investment |
3,60,000 |
5,73,747 |
Returns |
3,37,017 |
4,38,551 |
Recommended Mutual Funds for SIP in 2024
- HDFC Mid-Cap Opportunities Fund
- Parag Parikh Flexi Cap Fund
- ICICI Pru Bluechip Fund
- HDFC Flexi Cap Fund
- Nippon India Small Cap Fund
- HDFC Balanced Advantage Fund
- ICICI Prudential Equity & Debt Fund
- ICICI Prudential Corporate Bond Fund
- ICICI Prudential Short Term Fund
- LIC MF Gold ETF FoF
How to invest in SIP?
Choose the Right Mutual Fund Scheme: Research and select a mutual fund that aligns with your financial goals, risk tolerance, and investment horizon. Consider the fund's past performance and fund manager's expertise.
Decide on the Investment Amount: Determine the amount you wish to invest regularly. Start with a manageable amount and increase it as your financial capacity grows.
Select the SIP Date and Frequency: Choose a date each month when your SIP amount will be automatically deducted from your bank account. Most investors opt for monthly SIPs, but you can also select weekly or quarterly frequencies.
Complete the KYC Process: Ensure you are KYC (Know Your Customer) compliant. This involves submitting proof of identity, address, and a recent photograph.
Set Up the SIP Online or Offline: You can start a SIP either online through the mutual fund's website or a financial platform, or offline by visiting the fund house or your bank.
Monitor and Review Your Investment: Regularly review your SIP investments to ensure they are aligned with your financial goals. Adjust your SIP amount or switch funds if necessary.
Conclusion
Understanding the different types of SIPs empowers investors to make informed decisions and build wealth systematically over time. By selecting the right SIP types based on their financial goals and risk appetite, investors can embark on a journey of wealth creation with confidence and peace of mind.