What are the types of SIP?
In our earlier article- What is SYSTEMATIC INVESTMENT PLAN (SIP), we have seen that SIP is a tool that helps you to invest in a Mutual Fund Scheme in a smart and hassle free way. A SIP is a flexible and easy investment plan. Let see the types of SIP in this article.
Different mutual fund houses provide different types of mutual fund scheme with SIP. But now a days traditional monthly SIP transformed into new varieties of SIP. Lets see it.
Detailed Explaination of Types of SIP
1. flexible SIP
Traditional SIP invests a fixed amount periodically in Mutual Funds whereas in Flexi SIP, the amount is ‘not’ fixed and as the name suggests, you as an investor can change the amount every time before investment.
If you opt for flexi-SIP, you need to choose a regular amount and the maximum amount which you would like to invest. Thereafter, your monthly investment can vary from the regular amount to the maximum amount specified. If the amount remains unchanged, regular amount would be considered for that month.This strategy is beneficial for investors who have irregular monthly income. So, with this option, they can change their monthly SIP according to their income of that month.
- Some pro-active investors also use this option to invest more through their SIP when markets are low. For Example, your regular SIP amount is ₹1,000 per month and the market is down, you may want to invest more on that date, say an amount of ₹3,000.
- Not all fund houses provide this option, only few fund houses and few mutual fund brokers provide this option.
- Flexi SIP solutions also come with a trigger-based option, where the SIP amount is determined by triggers such as the broader market hitting a valuation multiple or scheme NAV changing by a certain percentage. For Instant, Flexi SIP facility by Kotak Mutual Fund considers the prevailing PE of the Nifty50 index to decide the monthly SIP outflow. As a default option, it will invest three-times the SIP amount when the index PE ratio equals or falls below 15. So, if you have chosen an SIP amount of Rs. 5,000, the monthly outflow will rise to ₹15,000 when the market trades below a P/E of 15.
- Why to choose Flexi SIP- Actually Flexi SIP plans mostly connected to fundamental ratio. Whenever market fall and it hit the pre fixed level or lower than fundamental ratio than the investment goes directly.
2. step-up SIP or Top-up sip
- Step-Up SIP, the amount of investment increases at a pre-defined rate and period. Since our salary mostly increases every year by a certain percentage, so it is wise to increase your SIP by same percentage every year. When you make an application for a fresh SIP, most fund houses ask you to specify whether you want to increase the investment amount periodically and by what amount.
- For Example, let us assume you started an SIP with Rs. 20,000, and you ask for a yearly top-up by Rs. 2000. So, after first year, your systematic investment will go up to Rs. 22000 a month. Then, after another one year, it will go up to Rs. 24,000, and so on.As our age increases, our income increases and it is obvious that our investments should also increase because our goals increase and the time horizon reduces. An SIP started at age of 25 at Rs. 10,000 may not be able to meet many of your financial goals, so it is important that you step up your SIP based on your average income growth each year.
- With increment of investment amount at continues intervals basis, it easy to accumulate a huge corpus to attain your financial target.
- You have provided an option to have a fixed limit to top up amount or keep it flexible top up cap. You can set a period till you would want to continue your top up sip facility. And option is required to set at time of enrollment of sip scheme. Further, detail of top up cannot be alter after enrollment.
3. perpetual sip option
- When you start an SIP, the mutual fund company or broker would ask you the start date and end date of your SIP. Instead of end date, most of the fund houses are giving option of Perpetual SIP which means SIP with no end date. It can only be stopped manually when required.
- Few years back, this facility was not available and hence most SIP’s would automatically stop after few months or years. Due to this stoppage, many a times paperwork needed to be done again to restart the SIP. More often than not, any sort of discontinuity interrupts the power of compounding.
4. SIP + FREE INSURANCE OFFERED BY FEW FUND HOUSES
- Few fund houses are giving free insurance cover if you do a long-term SIP with them. Birla Sunlife, ICICI Pru and Reliance Mutual Fund provide free Group Term insurance cover of 10 times the monthly SIP instalment during the first year. The cover will increase to 50 times during second year and to 100 times (120 times for Reliance) from the third year onwards subject to maximum cover of Rs. 20 lakhs (Rs. 21 lakh for Reliance) per investor across all folios and schemes. Performance of the fund is in no way influenced by this add-on.
- Which means that if you are investing in these products with Rs. 5000 p.m. SIP instalments, your insurance cover would be Rs. 50,000 in the first year, in second year it would be Rs. 2.50 lakh and third year onwards Rs. 5 lakhs.
i. Few points to note:
- Facility is only for Equity Funds
- Insurance offered is a Term insurance which simply gives a sum assured to the nominee in the event of the investor’s death.
- Insurance is a completely free component. The expense ratio or the performance of fund is not influenced by this offer.
- Insurance is given till the age of 55. So, if you are 55 and above, it is not applicable to you.
- Buy an adequate Term Insurance cover separately. Do not depend on this feature for your insurance needs, as the cover will be insufficient.
- While you opt for this feature while starting a SIP with a mutual fund, at the time of the claim, you would need to deal with the insurance company yourself. The AMC in no way guarantees claims settlement.
- If you discontinue your SIP within three years, you will lose your insurance coverage.
- You will also lose your cover if you redeem or switch out your investments anytime during the tenure.
- It will cover only the first unit holder. The second and third unit holders will not get any insurance cover.
- Exit load under such schemes is generally higher than the versions of same schemes without the insurance cover. For Example: Reliance charges an Exit load of 2% if you redeem your investment before you turn 55.
ii. How do Fund house manage insurance cost?
- For the fund house, insurance doesn’t come cheap; they negotiate a group term insurance cover for all investors under this facility and the pricing for insurance is done accordingly.
- Typically, the annual premium for a 30-year-old for a term cover of Rs. 10 lakhs over 25 years is about Rs. 1,300-1,500/year. The expense will be cheaper per person in case of a group cover but still a significant cost considering lakhs of investors. Not every fund house can afford providing free insurance, therefore only large ones like ICICI, Reliance and Birla are offering such schemes as they can afford to absorb these costs.
- Should you buy? At no additional cost to you, this sure seems like a bonus to cover with your equity investment. But there is a big condition and i.e. you should select the fund scheme for its merit and not for insurance cover. Also, do not depend on this insurance cover as it would be insufficient and cover gets revoked as you redeem your investments.
5. trigger SIP
- A person, who is experienced about market and aware about market volatility and huge knowledge about financial market. He can choose trigger sip because of all information you can set your target of NAV, market index level, any specific event, date or other information.
- Like if you know about global market gold price is decreasing than their impact on oil companies, any government policy which impact on market index level.
- But it’s always better to invest your money for long term in mutual fund to achieve your financial target, so you should have to avoided trigger sip because it’s risky and incites speculation.
6. Pause sip
- In this type of SIP a facility is provide to investor to put on hold his payment of sip for a particular time period without cancellation of sip.
- This temporary period of holding is from one month to three months. And its again restart after completion of pause period automatically.
- It is beneficial when someone facing financial crises and its difficult for him to make sip investment.