When someone enters the job market, they have two goals. The first one is to shop to their heart’s content. The second goal is to accumulate enough wealth in the future so that they could live life comfortably after retirement. While you may think that saving money obsessively will help you with long-term wealth creation, the fact is that investing is the only way to achieve it. All that needs to be done is invest in mutual funds. There are two ways in which your funds can be allocated into a mutual funds scheme. One is through lump-sum investment, where the entire amount is paid in one go. The other is through a systematic investment plan (SIP).
What are SIPs?
A systematic investment plan (SIP) helps you to invest small amounts of money at regular intervals. The sum deducted is invested in your preferred mutual fund scheme. Thus, it helps to diversify your risk over time. It enables people who don’t have a lump sum of money to start investing. Once a SIP is activated, the bank deducts a fixed amount every month for the tenure of the investment. With each SIP deposit, you get a certain unit of the mutual fund. It is possible to choose a mutual fund scheme based on your risk appetite and requirement. NAVs of mutual funds update daily so the purchase cost may vary and the same will reflect on your units. But it is important to note that SIPs are not a monolith.
What are the types of SIPs and are they helpful to beginners?
Listed below are the numerous types of SIPs that are available in the market:
- Perpetual SIP:
With the help of Perpetual SIP, you can invest periodically in a mutual fund scheme of your own choice every month for a pre-determined tenure. While signing up for the SIP mandate, the investors have a choice not to enter the end date in the SIP mandate. In case the column is blank, it is considered to be a perpetual SIP. As SIPs are specifically designed to instil the habit of financial discipline and promote a goal-based approach, it is always advisable to start SIP for a fixed period.
- Flexible SIP:
This type is known for providing an option to decrease or increase the SIP amount according to your cash flow. Thus, in case, if you face any type of cash crunch, then you can skip paying a few instalments of SIP till your financial situation normalizes. Similarly, you can also increase the SIP amount in case you receive a bonus or make some gains. While investing in flexible SIP, you will have to stipulate a fixed number of investments. The plan provides an option to change the investment amount of that month 7 days before your SIP date.
- Trigger SIP:
If you are someone who has a proper understanding of the market and is aware of the market volatility, this option is beneficial. To start this SIP, you need to set things like an index level, event, NAV or a specific date to start this SIP. But it is advisable to not opt for trigger SIP as it incites speculations. It is always better to choose a long-term tenure to foster your financial goals.
- Top-Up SIP:
These plans allow investors to increase the SIP amount at regular intervals. They provide an advantage to investing in mutual fund schemes that are performing well in the market. Moreover, by increasing the investment amount at regular intervals, you can accumulate a huge corpus to achieve your financial goals.
Even though SIP provides the facility of flexibility and convenience to you, your key objective should be to stay invested in SIP for a longer tenure and avoid any short-term financial limitations. You can achieve your long-term and short-term goals by making a disciplined and smart investment.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.