What Is Sip? How Does It Work, and What Are the Types of Sip?

What is SIP?

A SIP or Systematic Investment Plan is an innovative and hassle-free tool for investing in mutual funds. In SIP, an investor chooses the best mutual fund scheme and invests a fixed amount at regular intervals. It is like recurring deposits, where you systematically save a particular amount. The difference in SIP is that you frequently invest a specific amount in mutual funds that can defeat inflation and make wealth for the long term. SIP investment is about investing a small amount repeatedly rather than investing in lumpsum.

 

SIP investment is best for people who don't have the time to analyse the market or can't pick the best mutual fund to invest. The mission is to keep on adding small amounts frequently to get your wealth compound in the long run. 

 

How does SIP work?

SIP in mutual funds allows you to invest in any type of mutual funds at regular intervals. It helps you in creating wealth over a longer period. You can invest a specific amount towards a monthly SIP and automate the deduction on a fixed date. For example, a monthly SIP automatically deducts Rs 2500 on the 10th of every month from your bank account.

 

What are the types of SIP?

1. Regular SIP

The simple and most accessible form of SIP in mutual funds is Regular SIP. This SIP lets investors choose the period pattern of their investment, i.e. daily, weekly, monthly, semi-annually or annually. However, the return through this SIP is low, and hence it is not recommended. Also, the investor can't change the amount during the investment period.

2.            Perpetual SIP

Every SIP in a mutual fund requires the investor to mention the start and end date of SIP. However, it is not mandatory to note the end date in the case of a Perpetual SIP. A SIP with no end date policy is called a Perpetual SIP. It is assumed the investment procedure will run until 2099. However, it is not recommended to short term investors.

3.            Top-up SIP

Under the Top-up SIP, you can increase a certain amount of instalment after every fixed period. For example, if your current instalment amount is Rs 2000 per month, you can increase it by adding Rs 500 after 6 months. Now your instalment amount is Rs 2500, which will increase to Rs 3000 after another 6 months. People seeing regular progress in their income can opt for Top-up SIP.

4.            Trigger SIP

In a Trigger SIP, an investor set a trigger point for their investment. For example, you can mention the highest or lowest amount at which you want to withdraw the investment or purchase the units of a best mutual fund at a particular trigger amount. There are various trigger options like amount, dates and index level like Sensex or Nifty. However, this SIP is recommended only for professional investors who can set triggers with their profound knowledge in analysing the market.

5.            Flexible SIP

Flexible SIP lets you increase or decrease the amount of investment at your convenience. While a fixed SIP in mutual funds does not allow you to change the amount of investment, in Flexible SIP, you can change it before 7 days of the installment date. It is recommended to people with irregular cash flows.

 

Invest in a SIP through the best mutual fund advisor. Contact us here to learn more.