7 Types of SIP That Every Mutual Fund Investor Should Know About

Regular systematic investment plan is probably the most availed type of SIP currently. This involves investing a fixed amount in a mutual fund of your choice for a predetermined time period. While the most common time interval between investments is monthly, you have options of choosing other time periods as well such as daily, bi-monthly, quarterly, and even half-yearly in the case of some schemes.

In this type of SIP, the individual amount invested does not change with time, however, through the power of compounding, you can potential gather a large corpus over time. Additional benefits of a regular SIP include disciplined investing and rupee cost averaging.

Flexible SIP, as the name suggests, allows you to be more flexible with your investments. With this type of SIP, you can flexibly change the investment amount and duration of SIP, as per your financial situation or investment needs. However, if you want to make such changes to the investment amount of tenure, you must reach out to the fund house typically at least one week before the next SIP due date to initiate the change. This week-long intimation period may be longer in the case of some fund houses.

The benefit of a flexible SIP is that it can allow you to invest more or less depending on current market conditions. So, you can potentially reduce the SIP amount when the market is high and increase the amount when the market is low. You can also change the SIP investment amount if there are fluctuations in your earnings. However, flexible SIP may make it difficult for investors to maintain investment discipline over the long-term.

Step-up SIP, which is also known as Top-up SIP, allows you to increase your systematic investment amount periodically. The idea is to increase your monthly investment amount in line with your income. This way, by increasing investments with time you will end up investing more compared to regular SIP, so you would potentially be able to create a larger corpus.

For instance, if your current monthly SIP amount is Rs.3000, and your top-up rate is set at 10% annually, then for the second year, your monthly SIP amount will be Rs.3300, in the 3rd year your monthly SIP will be Rs. 3600 and so on. The below table compares the maturity amount for a regular monthly SIP of Rs. 5000 to a step SIP starting with Rs. 5000 monthly and with a 10% step up on an annual basis over a 15-year investment period assuming 12% p.a. return:

As, you can see, a step-up SIP can help you to create significantly more wealth over time as compared to a regular SIP even if you initially start off with a relatively small amount. You can easily use a SIP calculator to figure out how much more wealth your long term investments can potentially create provided you top-up your SIP investments and continue investing in a disciplined manner.

A Trigger SIP may be defined as a systematic investment plan where investments are made when specific pre-set investment opportunities present themselves. Such predetermined event can be a specific market level of an index like the Nifty Smallcap 250 Index or Sensex, or if the Net Asset Value (NAV) of the fund chosen for investment drops to a specific level.

In type of SIP, you are typically required to make an initial investment in a low volatility debt scheme such as a liquid fund and when the pre-determined trigger occurs, a specific amount is invested in the target fund by redeeming units of the fund where the initial investment was made. This type of SIP is better suited for those with an idea or experience of the market. Hence, if you are a novice investor or have been out of touch with the market for a while, it is best not to opt for this type of SIP.

Perpetual SIP is the same as regular SIP, just without the predetermined investment tenure. You can keep investing for as long as you want and the maximum tenure available is currently 33 years for most mutual funds. When you want to stop investing, you have to request the fund house to cancel your SIP to permanently stop future investments or pause your SIP, if you want to stop temporarily.

The benefits of this type of SIP include the fact that you don’t have to worry about renewal, and you can maximize investment benefits through long-term compounding. This in addition to fact that you can stop your investment temporarily or permanently at any time.

In all the above types of SIP, you get the opportunity to make systematic investments in only a single mutual fund scheme at a time. This is where multi-SIP works differently. This type of SIP allows you to invest in multiple mutual fund schemes of the same fund house at the same time via a single monthly deduction from your bank account.

This way, you can leverage a single SIP investment and invest in multiple schemes of that fund house. For instance, if you are going to invest Rs. 10,000 monthly through multi-SIP, your investment will be allocated as Rs. 2500 for each of the four schemes offered by that fund house. However, you might even get an option to choose how much of your monthly investment will be allocated to a specific scheme on a monthly basis.

This is a type of SIP that offers dual benefit of life insurance cover and investment through a mutual fund. Currently, relatively few fund houses in India offer this type of systematic investment plan and that too for a limited number of schemes.

The life cover amount offered in such cases is based on the monthly SIP amount invested and is available only during the period when the systematic plan is active. So, the life cover offered in these cases is discontinued once the SIP ends or is cancelled. In the case of the investor’s death while the SIP is still active, the sum assured amount available as life cover is paid out to the nominee as a lump sum.

There is not any single type of SIP that suits every individual and each type of SIP features unique benefits that may be suited to a particular type of investor. For instance, while a regular monthly SIP may be suitable for a salaried individual with a regular income, flexible SIP may be better suited to the needs of a self-employed investor with income that may fluctuate seasonally.

Alternatively, the multi-SIP option may be preferred by those who are looking to diversify their investment across multiple asset classes or market capitalisations. A case might be made for perpetual SIP for investors who are not able to regularly track investment or have difficulty maintaining investment discipline in the long-term. So, in order to figure out which type of SIP is suitable for you, you need to be clear about your current financial situation, your financial goals and which benefits of SIP are best suited to your unique needs.