Want to make the most of SIP investment? 5 types of Systematic Investment Plans which will boost your returns

Published: September 23, 2019 12:14:33 PM

Through rupee-cost averaging, SIP eliminates the need for market timing and also helps reap greater benefits from the power of compounding.

SIP, SIP Investment, Systematic Investment Plan, mutual funds, mutual fund investment, SIP calculator, Top-up SIP, Flexible SIP, SmartSIP, Perpetual SIP, Trigger SIPA Systematic Investment Plan (SIP) helps you to invest a fixed amount at periodic intervals (daily, monthly, and quarterly) over a period of time.

Investing is an arduous exercise because of the risk associated with each investment avenue and the research that goes into selecting the ones most suitable. When investing, you can never guarantee the returns you might get, but there are things you can do to boost the potential for a positive outcome.

Mutual funds are a convenient way to invest your money. Even if you’re starting with small sums, you get the benefit of a professional fund manager who manages your money and decides on which stocks or bond to invest in for you.

SIP (Systematic Investment Plan) is an investment strategy which helps an investor ensuring them to do regular and disciplined investing. Through rupee-cost averaging, it eliminates the need for market timing and also helps reap greater benefits from the power of compounding.

Following are the different types of SIPs and how they are superior to a normal SIP:-

1. Top-up SIP

A Systematic Investment Plan (SIP) helps you to invest a fixed amount at periodic intervals (daily, monthly, and quarterly) over a period of time. As the investor’s income goes up, he is able to set aside a higher surplus for investing. A SIP Top Up allows you to increase the monthly investment amount periodically. SIP top-ups can be specified as a percentage or a fixed amount every year. The minimum SIP Top-up amount is Rs 500 and in multiples of Rs 500.

For example:
Rohan wants to save money for a vacation home in 20 years. He decides to start a SIP in a mutual fund that invests in equities. By investing Rs 5000 each month and assuming a return of 12% p.a (assumed rate of return), Rohan can reach a corpus of Rs 45.5 lakh in 20 years. However, if Rahul decides to top up his SIP investment by 10% every year, he can reach this Rs 45.5 lakh corpus in less than 16 years. That means his goal can be achieved 4 years earlier if he increases his SIP contribution by 10% every year.

Topping up an SIP has advantages like:

# Adapts to your rising income
# Helps reach financial goals faster
# Helps fight inflation
# Allow you to keep investing in an existing plan rather than open a new one

2. Flexible SIP

A Flexi SIP allows the investor to vary the amount of their investments every month. If the investors do not want to invest a fixed amount, and prefer more control over their investments, they can set up a Flexi SIP. This SIP allows the investor to increase or decrease the investment amount as per the cash flow the investor has. They will have to specify a default amount for their investments. Seven days prior to the SIP’s date, one has the option to change the SIP amount for that month. If the SIP amount is unchanged, the default amount selected will be invested.

How does this help investors?

# Combine the discipline of a systematic investment plan (SIP) without any restrictions
# You can increase / reduce your SIP amount or pause your SIP
# Alter your monthly investment amount and the types of funds you invest in, to suit your affordability and convenience
# Get amazing control over your mutual fund investments

Watch: How To Withdraw PF Online

3. SmartSIP

Smart Investors:

# Buy more when markets are inexpensive or undervalued (double their investments)
# Hold and continue investing when markets are fairly valued
# Sell when markets are very expensive and avoid new investments

Therefore, SIP is not smart investing; it’s simply disciplined automated investing!

This is how SmartSIP differs from ordinary SIPs:

# SmartSIP invests your monthly SIP amount in equity mutual funds units when the markets are fairly valued and doubles your monthly SIP amount when markets are very undervalued

# SmartSIP skips fresh investments in equity schemes when markets are expensive and books profits/sells a part of your existing equity units when markets are very expensive. The sale proceeds and monthly instalment are invested in liquid schemes

# SmartSIP skips your investment in equity scheme units and parks the SIP amount in liquid schemes which is later used to buy equity MF units when markets become inexpensive

So, investors buy more when markets are cheap and sell when markets are expensive and the same gets replicated in SmartSIP while keeping all the discipline of SIPs.

Advantages of Smart SIP

# Higher Returns than normal SIP on absolute and risk adjusted basis
# Higher Realizable value of invested amount
# Lower Risk since money is allocated to liquid schemes in expensive time

4. Perpetual SIP

In an SIP, you make periodic investments in a mutual fund scheme of your choice generally every month for pre defined tenure. An SIP mutual fund is referred to as Perpetual SIP if you do not mention the end date in the mandate date. While signing up an SIP mandate, you have the option to leave the end-date column blank. If the column is blank, it means the investor has opted for a perpetual SIP. This SIP allows the investor to redeem the funds whenever required or when the investor has achieved his financial goals. Opting for this mode of investment should be done cautiously because it also requires you to monitor your funds’ performance from time to time. It is so because most investors fail to watch their fund’s performance and eventually, loose returns over the long-run.

What are the advantages of perpetual SIPs?

# Registering an SIP involves a lot of paperwork and it takes time.

# It is observed that many investors skip their SIP installments when they go for short-tenure options. Distributors point out that investors tend to delay renewals due to operational hassles and end up missing a few installments. This affects the returns in the long term, breaks discipline, and prevents investors from meeting their financial goals. Perpetual SIPs help you maintain continuity.

# A perpetual SIP is more beneficial for younger people. For example, a 25-year-old can continue an SIP for at least 30-35 years without disturbing the investment flow. So, he could opt for a perpetual SIP. However, a 55-year-old working person would want to review his investments once he retires and may not necessarily want to opt for SIPs post retirement.

5. Trigger SIP

Trigger facility in an SIP enables investors to set target based on pre-specified date, price and index level as per their need, risk appetite and goals.

A person invests Rs 10,000 in an equity scheme and buys 1000 units in NAV of Rs 10 and opts for trigger facility where he requests the fund house to transfer his profit to an income scheme once his investment generates 20% returns. So, whenever the NAV of his investment grows 20 percent i.e. if it reaches Rs.12 then Rs 2000 is automatically transferred to the income scheme.

Similarly, he can request for a transfer if his investment hits a pre-determined point on the downside. In this example let us say, he would not like to lose more than 20% of his investment. In such a situation, he can ask for a transfer to the income scheme when the NAV hits Rs.8.

What are the advantages of Trigger SIPs?

# Investors can set trigger points for both upside and downside conditions.
# They can also redeem their entire investment or transfer full portion in any scheme after reaching pre-specified target.

# Trigger facility enables investors to shift easily between debt and equity funds within the same fund house.

# This facility helps investors to check market volatility to some extent. Investors can book profit, transfer their earnings to other schemes and reduce market risk by opting for trigger facility.

Systematic Transfer Plan

While SIP is the transfer of money from savings to a mutual fund plan, STP means transferring money from one mutual fund to another.

STP is a smart strategy to stagger your investment over a specific term to reduce risks and balance returns.

If you opt for STP, you tend to generate higher returns. It is because, for an STP, you will be initially investing the lump sum in a debt fund like a liquid fund. Liquid funds are known to yield higher returns in the range of 7%-9% as compared to the mere 4% returns earned in a savings bank account. The returns you earn via STP are pretty reliable. This is because the amount in debt fund generates interest until you transfer the entire amount. In case of a volatile market, STP helps the investors to periodically transfer funds from source scheme to target scheme and help them save the effort and time by compressing multiple instructions required for redemption from one scheme to invest in the other into a single instruction.

(By Omkeshwar Singh, Head–Rank MF, Samco Securities)

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