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Types of SIP: Features and Key Differences Explained

Types of SIP: Features and Key Differences Explained

Summary: A Systematic Investment Plan (SIP) is the process of making investments regularly, and not a type of investment plan per se, where the returns depend on the actual mutual fund invested in. Understand the differences between the various kinds of SIPs, including regular SIP, step-up SIP, flexible SIP, perpetual SIP, trigger SIP, and multi-SIP, and see how rupee cost averaging and step-up increments create wealth.

Systematic Investment Plan (SIP) is neither an investment instrument nor a complex process, but just an easy way of investing a fixed amount of money in mutual funds periodically. In case you are interested in accumulating money for your future or managing fluctuating incomes, it is important to know about the types of SIP plans available. As the returns on your investments would actually depend on the performance of the mutual fund in which you have invested and not on the SIP plan itself, it makes sense to look into various plans available according to your budget and goals.

What is a SIP? (A Quick Recap)

SIP is one of the easiest ways for an investor to invest a fixed amount of money in a mutual fund either on a monthly or quarterly basis. Regular investments through SIP help investors make use of rupee cost averaging, wherein more units of investment are made in times of low prices and fewer units during high prices. All that SIP is is an investing tool, and the returns earned through it entirely depend upon the mutual fund chosen to support the type of SIP investments.

Also Read – Investment plans for the girl child in India

The Main Types of SIP

Selecting the appropriate option requires understanding which plan will suit your income and requirements. Various lenders and fund houses have put forth a few basic options that will help you understand different types of SIP before selecting various kinds of SIP funds:

        Name                     How It Works               Best Suited For
Regular SIPPut in the same fixed amount at regular times.Beginners and people with a steady, fixed income.
Step-Up / Top-Up SIPAutomatically increases your investment amount a little bit every year.People whose salaries go up over time and who want to save more.
Flexible / Flexi SIPIt lets you change your investment amount depending on your current cash flow.Freelancers, business owners, or anyone with uneven income.
Perpetual SIPRuns without an end date until you tell the fund house to stop it (though bank mandates have a 30-year limit).Long-term goals are where you want your money to keep growing without interruption.
Trigger SIPMakes transactions happen automatically based on specific market dates or conditions.Experienced investors who know how to time the market.
Multi SIPSplits a single payment across multiple different mutual funds at once.Investors who want easy diversification across different funds.

How does SIP work?

The principle behind SIP is the operation of a simple and hassle-free process that eliminates the pressure of market timing entirely:

  • Automatic Process: Select a suitable mutual fund scheme, fix an amount that is convenient for you, say ₹10,000 per month, and select a particular date every month, like the 5th of every month.
  • Auto-debited: Your bank debits the amount on that chosen date without you having to do anything manually or remember the investment deadline.
  • Units Bought: Using that fixed amount, the mutual fund scheme buys mutual fund units at the market value on that very date.
  • Inbuilt Cost Averaging: As market values vary every single day, your investment purchases more units when the value falls and fewer when it rises. This brings down your cost per unit over time.
  • The Effect of Compound Interest: With consistent investing every month, compounding works on your investments silently, building your wealth in the background.

Also Read – Types of mutual funds in India

Step-Up SIP vs Regular SIP: Why the Difference Matters

Regular investment in a fixed amount is the best benchmark to start with, but with a Step-Up SIP, you can build up your savings faster without adding any extra burden on yourself. For example, making regular SIP investments of ₹10,000 every month is a good idea, but making an additional 5% top-up on an annual basis will increase the pace of saving along with your growing earnings. Exploring different types of SIP investment schemes helps to understand how small steps make a big difference.

15-Year Growth Comparison (Assuming a 12% Annual Return)

        SIP Strategy   Monthly Contribution Structure Estimated Total Fund
Standard SIP Investment₹10,000 flat every month₹50 Lakhs
Step-Up SIP InvestmentStarts at ₹10,000, increasing by 5% yearly₹65 Lakhs or above

Benefits of Investing in SIP

Understanding the benefits of different types of SIP mutual funds is a lot easier once you know how convenient it is to follow the systematic investment approach:

  • Effortless Development of Saving Habit: With automated debits from the bank account, there will be no more worries about keeping track of the dates and transferring the money yourself.
  • No Hassle Averaging of the Market: It is not necessary to think about when to invest when the market is up, and when it is down, your fixed investment amount will bring more units when the price goes down and fewer units when it goes up.
  • Easy-to-Start Approach: You can begin investing even starting with small sums of money, monthly investments of at least ₹500.
  • Fast Growth: Investing your money for a longer period will result in generating profits from the previously earned gains.

Also Read – PMS vs Mutual Fund

How to Choose the Right SIP for You

Selection of appropriate structure depends on whether the cash flow of the individual matches their financial goals. It must be kept in mind that SIP is merely a medium, and the selection of appropriate types of SIP and type of SIP investment is much more important for the actual performance of the portfolio.

  • Regular Income & Easy Way: If your income is regular every month and you like an easy way of investing, then a Regular SIP is the best way to do automatic investing.
  • Increasing Income: In case your income increases yearly, then Step-up SIP helps you to automatically increase your investment amount along with your increasing income.
  • Variable Income: If you are a freelancer or businessman with variable income, then Flexible SIPs will help you to increase your instalment amount according to your income.
  • Long-term Investing: If you have long-term goals such as planning for retirement, then a Perpetual SIP will work for you forever until you stop investing in it.
  • Instant Diversification: If you want instant diversification of your money in different schemes at the time of investment, then Multi SIP is the right choice for you.
  • Active Market Knowledge: If you are well aware of the market and you want to automate some actions according to specific index levels, then you should consider Trigger SIPs.

Your overall decision will always depend on your personal objectives and investment time period, and seeking the guidance of a financial adviser will always be a wise move. To explore mutual fund options and start your journey easily, you can explore and start a SIP on Tata Capital Moneyfy.

Conclusion

An SIP (Systematic Investment Plan) is merely an approach to investing regularly rather than an investment option in itself. Though there are various types of SIPs, which include regular SIP, step up SIP, flexible SIP, perpetual SIP, trigger SIP, and multiple SIPs, suited to varying income groups and requirements, step up SIPs provide an easy way to accumulate more funds. Perpetual and trigger SIPs require greater scrutiny, including controlling a cap on the NACH for 30 years and minimising the risk of market timing, respectively.

Always base your decisions on your own objectives, but remember that profits are linked to the market conditions. Once you feel ready to move forward, you have the option to easily explore different SIPs through the Tata Capital Moneyfy SIP.

Disclaimer: Tata Securities Limited (TSL) is authorised by the Association of Mutual Funds in India (AMFI) as a Mutual Fund Distributor with ARN Number 0021. Investing in mutual funds involves market risks. Read the scheme documents carefully before investing. The information here is general in nature and does not constitute financial or investment advice; you should consult your independent financial adviser before investing.

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FAQs

What are the different types of SIP?

The different types of SIP are regular SIP, step up/top up SIP, flexible SIP, perpetual SIP, trigger SIP, and multi-SIP. These different SIPs are constructed based on the different types of income and investment strategies.

What is a step-up (top-up) SIP?

Step Up SIP is one of the options that increases your investment amount regularly, either by a fixed amount or a fixed percentage and is thus a popular choice for investors in various types of SIP mutual funds.

What is a perpetual SIP, and does it run forever?

A perpetual SIP is an ongoing SIP with no fixed ending period, as you can terminate it at your own will. This makes it an ideal SIP plan for any long-term wealth builder.

What is a trigger SIP, and who should use it?

The trigger SIP is one that makes automatic trades depending on predefined market conditions or dates, thus qualifying as a specialised fund among the various types of SIP funds available for investors.

Which type of SIP is best for beginners?

A regular systematic investment plan is recommended to beginners because it involves predictable monthly investments, which further makes it a simple form of SIP investment.

Is a SIP an investment or a method?

Yes, SIP is the approach to investing systematically in mutual funds in fixed installments at regular intervals, which is not an investment itself but explains the functioning of various SIP investments.

Are SIP returns guaranteed?

No, returns on various SIPs are not assured since the investments are made into schemes of mutual funds, which change according to their market performance.

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