Systematic Investment Plans: Key Things to Know

Key Takeaways:

• Systematic Investment Plan is the disciplined and convenient way to invest in mutual funds.

• The best SIP to invest in depends on the investment horizon, financial goals, and risk profile.

• This blog explains the classifications and types of Systematic Investment Plans.

• Consistency over timing gives better results.

Introduction:

In today’s uncertain economic environment, investing a part of income is no longer a discretionary activity and has become a critical component for long-term financial planning. With rising inflation, changing interest rate cycles, and increased market participation, individuals are seeking financial avenues to build and preserve wealth over time. 

Among the available financial instruments, a mutual fund is most commonly preferred because it pools capital from multiple investors and allocates it across a diversified portfolio of assets such as equities, debt instruments, and money market securities. This system encourages participation in broader market opportunities and allows the benefits of professional portfolio management and diversification, with relatively modest amounts. 

One of the methods of investing within the mutual fund ecosystem is the SIP (Systematic Investment Plan), which requires a fixed sum contribution at pre-determined intervals, typically monthly, and offers options for weekly and quarterly contributions. 

Out of the various methods of investing in mutual funds, this approach is preferred over other mutual funds due to the following:

• Low Entry Barrier: Can start with a small amount, allowing market participation

• Investment Discipline: Develop a structured and consistent investing habit 

• Market Volatility Averaging: Investing at different price levels averages the cost over time

• Flexibility: The investment amount can be increased, paused or discontinued anytime.

• Compounding Advantage: It earns return on your initial investment plus on the accumulated returns from previous periods. 

• Operational Convenience: The amount is auto-debited, with no active tracking requirement.

However, the best SIP to invest in depends largely on an investor’s risk appetite, financial goals, and investment horizon.  

Classification of Mutual Fund Systematic Plans:

Mutual fund categories are classified into:

1. Equity Mutual Funds

• It is a fund which emphasises investment in equities and equity-related instruments

• It seeks long-term capital appreciation and can be volatile in the short-term

• Suitable for investors who can take a higher risk and invest for the long term

• It includes various categories like multi-cap fund, flexi-cap fund, large-cap fund, mid-cap fund, small-cap fund, ELSS and more. 

2. Debt Mutual Funds

• It is a fund that emphasises investment in bonds or other debt securities

• A debt fund is also known as an income fund

• It has the potential for income generation and capital preservation. 

• It includes various categories like short-term debt funds, floater fund, corporate bond fund and more.

3. Hybrid Mutual Funds

• It automatically allocates monthly investment between equity and debt instruments based on the fund’s pre-defined strategy.

• It seeks a balance between growth and income by investing in both equity and debt, by investing 65-80% in stocks for growth or 10-25% for stability in adjustment to market movements.

• It is suitable for investors seeking growth with stability and looking for high returns with less exposure to equity

• It includes categories like conservative hybrid funds, aggressive hybrid funds, equity saving and more.

Apart from these three categories, there are solution-oriented schemes for retirement and children, as well as schemes in index funds & ETFs and funds of funds. 

1. Solution - Oriented Schemes: For Retirement and Children

• These are goal-based mutual fund schemes for long-term financial needs

• They create wealth structurally for retirement plans and children’s future 

• Suitable for parents and individuals planning a retirement corpus

2. Other Schemes: Index Funds & ETFs and Fund of Funds (FoF)

• These funds are designed for specific financial goals or specialised approaches such as Index Funds & ETFs and FoF

• They provide goal-based planning, cost-efficiency and diversification

• Suitable for investors seeking global exposure, specific financial goals like children’s education and beginners

Types of Systematic Investment Plans

In mutual funds, this method comes in several forms to suit different financial goals, income patterns, and risk preferences. For beginners, the main types are – 

1. Fixed or Regular SIP

• It involves a fixed amount at regular intervals such as weekly, monthly, quarterly, or yearly. 

• It builds a habit of disciplined saving and is easier to manage.

2. Flexible SIP

• It allows investors the flexibility to increase or decrease their amount contributed based on their financial situation.

• If an income changes or expenses rise, the contribution can be adjusted accordingly.

• The changes should be communicated one week before the next due date.

3. Perpetual SIP

• It doesn’t have a fixed end date at the time of starting. Only an investor can decide whether to stop it or modify it.

• As per recent guidelines introduced in Oct 2023 under NACH, mandates can now be set for a maximum period of 30 years, with the collection date being mandatory.

4. Trigger SIP

• Investors can automate their amount based on specific market conditions.

• For example, an SIP can be activated when the market falls, reaches a certain index level, or when a scheme’s NAV hits a particular value. 

5. Step-up or Top-up SIP

• This type allows investors to gradually increase their contribution at regular intervals. 

• For example, an investor can increase the invested amount every year. 

• It is ideal for individuals expecting salary hikes or bonuses, helping them invest more over time and build a larger wealth corpus.

6. Value averaging investment plan (VIP)

• VIP is a strategy where the invested amount varies depending on market conditions. 

• Investors invest more when the market is low and invest less when the market is high, thus averaging out the costs. 

• While this may improve returns, it requires maintaining extra funds to invest during market dips, making it less suitable for regular investors and more appropriate for high-net-worth individuals (HNIs).

7. Multiple or Multi-Select SIP

• This option enables the investors to invest in multiple mutual fund schemes of the same fund house through a single SIP. 

• It helps in diversifying the portfolio and reduces the need to manage SIPs individually. 

   

 Conclusion:

Each SIP type serves a unique purpose and is suitable for a different type of investor. Investors need to understand this difference so that they can align their investment strategy with the fluctuations in the market and their long-term goals. Investors need to invest regularly, plan, and be patient during market fluctuations to create wealth.

Frequently Asked Questions (FAQs):

1. Which option is best based on risk profile?

• Low- risk options work best for conservative investors

• Medium-risk options work for balanced investors

• High-risk options work for investors comfortable with maximum volatility and long-term horizons

2. How much should be invested every month?

There is no fixed amount. The monthly amount depends on income, goals and timeline. 

3. Can different types be combined?

Yes, different types can be combined across large-cap, mid-cap or debt categories, which reduces risk and improves overall balance.

4. What happens if SIPs are stopped during market crashes?

If SIPs are stopped during market crashes, then they eliminate the rupee cost averaging benefits and reduce potential long-term returns.

5. Which systematic plan suits beginners?

Large-cap, hybrid or flexi-cap systematic plans are suitable for beginners due to lower volatility.

6. Is regular investing better than a lump sum investment?

Though the choice depends on the investor’s cash flow, risk appetite and market timing, regular investing is ideal for beginners and salaried individuals. Lump Sum gives higher returns in the rising markets if invested during market downturns.