Investment in mutual funds offers an effective and efficient path for wealth accumulation. Contributing to its growing popularity is the flexible approach to fund deposition, achieved through SIPs. Requiring a predetermined amount of money at specific intervals, they enable a wide range of individuals to benefit from market-based investments. This accessibility is further enhanced by the introduction of different types of SIP. While SIP promotes disciplined contributions, a thorough understanding of the suitable type of SIP is essential for maximum gains. Hence, this guide focuses on the crucial aspect of SIPs.

What is SIP?

Systematic Investment Plans or SIPs refer to the investment in mutual funds at regular intervals. Here, the investor gets rid of the requirement to make bulk investments, which is generally challenging for people. Hence, they get to invest a fixed amount each month or quarter or other period. It ensures disciplined investing and a sustainable approach to obtaining benefits from mutual funds and market volatility.

Types of Mutual Funds: SIP

There are various types of SIP plans to fit the different financial situations of the investors. Here are insights into the same:

• Regular or Fixed SIPs

  It simply involves the deposition of a specific amount of funds, generally each month. The period can be daily, weekly or quarterly as well. The funds can be automatically transferred to ensure adherence to a consistent investment plan.

• Top-up SIPs

  Top-up SIPs, also referred to as step-up SIPs, allow for an increment of the periodic investment. It is an appropriate option for investors whose income increases with time. The top-up SIPs are beneficial in aligning investments with increased earnings and accelerating wealth creation.

• Flexible SIPs

  These are also a simple option which allows adjustment of both the amount and the time of investment. Thus, the investors get the flexibility to adapt their cash flow as per the changing financial conditions. The investors can even pause the contributions. The flexible SIPs work with the goal of achieving a target portfolio value. Investors can invest a smaller amount during market downturns and a larger amount during market upswings.

• Multiple SIPs

  Here, the investors can choose to spread their investments across different asset classes or more than one mutual fund within a single SIP. It helps lower the risk without compromising the quality of returns.

• Perpetual SIPs

  These are ideal for long-term investments as perpetual SIPs lack any end date for investment. Thus, the investors can keep on investing as per their goals and requirements. These SIPs eliminate the hassle of renewal of SIPs or extending the investment plan. They also come with the flexibility to end or modify as needed.
  
  However, effective from October 1, 2023, the perpetual SIPs aren’t infinite. Rather, the National Automated Clearing House (NACH) introduced a maximum period of 30 years from the SIP issuance date. Further, specification of the end date or final collection date is also mandatory.

• Trigger SIPs

  These SIPs involve triggers to inform about the specific market conditions. The trigger points, when reached, lead to the automatic beginning of the investments. It is well-suited for individuals who wish to benefit from the specific market conditions as per their understanding. The triggers can start, stop or increase the investments depending on the parameters set by the investors.

• Equity SIP

  Here, the investments are to be done in equity mutual funds via SIP. It involves investment in stocks or ETFs to obtain higher returns, but comes along with high risks as well. Equity SIP involves investment in a disciplined and systematic manner at predefined intervals.

• Debt SIP

  The debt SIPs involve investment in debt mutual funds via SIP. Hence, the investments are made in fixed-income securities such as bonds and government securities. The debt SIPs are an effective option for obtaining stable returns at low risk.

• Tax Saving SIPs

  Also referred to as Equity Linked Savings Scheme (ELSS), this SIP allows both investment and tax-saving benefits. The tax benefits are applicable under Section 80C of the Income Tax Act. This SIP scheme comes along with a lock-in period of three years.

Key Aspects of SIPs

Regardless of the types of SIP investments, the basic benefit of this scheme remains the same. Here is what it encompasses:

Rupee Cost Averaging

SIPs help reduce the impact of market ups and downs. With fixed investment at periodic intervals, the investors get to buy more units during market downturns and fewer units when prices are high. This method of investment balances the overall cost with time and hence prevents the negative impact of market volatility.

Compounding Power

Beginning with even a small amount may help receive potentially higher returns with SIP. This is due to the compounding growth of the investments. Hence, an early beginning offers the maximum benefit.

Benefits of Investment in SIP

The choice of investment in appropriate types of SIP funds must be made with thorough consideration. The right choice helps receive the following benefits:

• Beginner-friendly: SIPs are safe, cost-effective, and ideal for those with limited market knowledge, enabling beginners to obtain quality returns.

• Allows consistency: The periodic investment, as per the investor's convenience, allows for consistent investment. It also helps utilise the funds for wealth generation without compromising the existing lifestyle.

• Hassle-free investment: SIP requires gaining understanding and knowledge initially to set the specifications for investment. After that, it’s largely automatic, with the flexibility to review and update as per the changing financial conditions.

• Protection from market volatility: The rupee cost averaging offers protection from market ups and downs.

• Enables diversification: The SIPs are compatible with portfolio diversification within the single SIP. It lowers the overall risk through the spread of the investments across different types of mutual funds.

Final Words

SIPs are a beginner-friendly and effective source of entering and benefiting from market investments. Encouraging goal-based planning, long-term wealth creation and even portfolio diversification, they allow investors to obtain returns from the different types of SIPs. However, the choice of the appropriate type depends on one’s existing financial situation, goals, income source and other aspects. A detailed analysis of the outcome is recommended before proceeding with any type of SIP.

SIP does not assure a profit or guarantee protection against loss in a declining market.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.