Different types of SIP: Features, benefits and how they work

Ask ten investors how they started their wealth-building journey, and many may mention the same approach: investing a small amount regularly through a Systematic Investment Plan (SIP). SIPs help turn mutual fund investing into a disciplined habit. However, many beginners overlook one important point: SIPs are not a one-size-fits-all investment approach. There are several types of SIPs, and each may suit different investment goals, income patterns, and preferences  

In this blog we are going to understand all about different types of SIP, its features, benefits and which types are good for investors.Whether you are a beginner exploring SIPs or planning a long-term investment, this blog will give you a clear starting point. This blog will give you a clear starting point.

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What is a systematic investment plan (SIP)

A SIP is a method where we invest a certain amount of our money every month into Mutual funds. It can be monthly, quarterly, or even weekly instead of making a lump-sum investment. The money is auto-debited from your bank account and invested in the mutual fund scheme you have selected.

Consider it similar to a recurring deposit, but with one important distinction: a mutual fund SIP's value fluctuates according to market conditions because it is tied to the market. It rewards discipline and patience for precisely that reason. Even if you are just starting out in your profession, a monthly SIP can start with a small amount.

How does SIP work in mutual funds?

Understanding how does SIP work is easier when you break it into steps 

1. Choose a scheme: Select a mutual fund based on your investing horizon, risk tolerance, and financial objectives.

2. Set the terms: Choose the amount, duration, and frequency of your investments (monthly, quarterly, etc.).

3. Auto-debit begins: The money is taken out of your bank account on each SIP date.

4. Units are alloted: You are given mutual fund units based on the amount divided by the day's NAV (Net Asset Value). You receive more units when the NAV is low and less when it is high.

5. Your investment grows over time: Through rupee cost averaging and the power of compounding in SIP, your investment grows as units accumulate and the fund performs.

How many types of SIP are there

The number of varieties of SIPs is contingent upon the structure of the fund house's offerings; however, seven are universally recognized. Therefore, what are the various types of SIPs? The following is a concise summary of the various varieties of SIPs in mutual funds. If you were inquiring about the varieties of SIPs in mutual funds, SIP types, or types of SIP plans, the following are the ones you should be aware of:

• Regular SIP

• Step by step SIP

• Top-up SIP

• Flexible SIP (also known as Flexi SIP)

• perpetual  SIP 

• Trigger SIP

• Multi SIPs

Types of SIP investment: Features, benefits and how they work

1. Regular SIP

What is a regular SIP? This is the most basic type of SIP trade and the one that most people use. You put a set amount of money on a set date and at a set time every month for a certain amount of time. You are the only one who can make things change.

• Features: fixed amount, fixed date, and fixed length of time.

• Pros: It's easy to understand, it helps you be more disciplined, and it works well for people with steady income.

• How it works: If you set up a Rs. 5,000 SIP for 10 years, that amount will be spent every month for 10 years.

Anyone with a stable budget and who is investing for the first time should use this.

1. Step-by-step-SIP

What does step up SIP mean? With a step up SIP, your SIP amount can be raised automatically at set times, like by 10% every year. You don't have to remember to make your investments grow as your income does over time because that's how it works.

• features: An increase in the amount that is set ahead of time and given at regular times, either as a percentage or a fixed amount.

• Benefits: It helps you build a much bigger nest egg with the same amount of money you start with, and it keeps your investments in line with rising prices and income.

• Here's how it works: you start with Rs. 10,000 a month and pick a 10% raise every year. The SIP goes up to Rs. 11,100 in the second year, then to Rs. 12,100, and so on.

• Best for: young workers and salaried people who expect to get paid more regularly.

1. Top-up SIP

What does "top up SIP" mean? You can add more money to an existing SIP with a top up SIP. This can be a one-time boost or an increase that is planned ahead of time. A lot of investors use it when they get a bonus, a reward, or money they didn't expect. "Top up" and "step up" are names used by some fund houses for the same thing, while others see "top up" as a way to increase the amount whenever you want.

• Features: You can add more money to your current SIP without starting a new one.

• Pros: It lets you invest extra money in the same scheme while still getting returns.

• How it works: You already have Rs. 8,000 SIP. When you get a bonus, you add more money to it from the next installment.

• Best for: Investors whose extra income comes and goes.

1. Flexible SIP

What does open SIP mean? Many people call this type of SIP a "Flexi SIP." It lets you change the amount of your monthly payment based on your cash flow. In some plans, you can invest more when you have extra money and less when you don't, as long as you don't go over the limits set by the fund house.

• Features: The amount of each payment can be changed within a certain range.

• Pros: It's good for people whose income changes every month, so a set payment doesn't get in the way.

• Here's how it works: you choose a base amount and let the fund house know ahead of time if you want to change a payment number.

• Best for: Freelancers, business owners, people who get paid by commission, and people whose income changes often should use this.

1. Perpetual SIP

What is SIP that never ends? An SIP that never ends has no set end date. You don't pick a term; instead, you let it go on forever until you decide to end it.

• Features: There is no set end date; it lasts until you cancel it.

• Benefits: It keeps you involved through market cycles, and you don't have to worry about forgetting to renew the SIP.

• How it works: When you sign up for the SIP mandate, you don't set an end date, so it runs every month. You can still stop or pause it whenever you want.

• Best for: Investors who want to build wealth over many years, like for retirement or saving for their children's future.

1. Trigger SIP

When a certain situation is met, a trigger SIP starts or changes. That condition could be a certain date, a certain NAV level, or a level of the market index. It builds on top of SIP by adding a rule-based layer.

• Features: Instead of a simple calendar date, an action is set off by a signal that has already been chosen.

• Pros: It gives investors more power if they want to move on clear signals or targets for market volatility.

• How it works: Your SIP can start only when the NAV falls to a certain level, or you can tell it to move gains to a different plan when a certain goal is met.

• Best for: Investors with a lot of experience who know a lot about the market. Because the rules change based on the market, it's not usually the best choice for people who are just starting out.

1. Multi SIP

How do I use multi SIP? With a multi SIP, you can put money into more than one mutual fund plan with just one mandate and one payment date. The whole amount is split between the plans you choose.

• Features: It has one registration, several schemes, and a single combined debit.

• Pros: It's easy to diversify, and it's easier to keep track of than having a lot of separate SIPs.

• How it works: every month you put Rs. 15,000 into three schemes, putting Rs. 6,000 into one, Rs. 5,000 into another, and Rs. 4,000 into the third.

• Best for: Investors who want a broad portfolio but don't want to deal with a lot of separate SIPs.

Difference between Types of SIP: Quick comparison

Which type of SIP is best for you

There is no clear winner because the best option depends on how much money you make, how willing you are to take risks, your financial goals, and how long you want to invest for. Take a look at this:

• To begin with, which SIP is best? An everyday SIP. It's simple, easy to understand, and simple to track.

• What kind of SIP is best for investing for the long term? It's a step-up SIP with a perpetual structure, which means it grows with your income and doesn't stop.

• For uneven income: a flexible SIP.

• To easily spread your money around:  use a multi SIP.

• With rule-based investments: a trigger SIP can work, but only if you know how it works.

FAQs

Is SIP really good for your long-term investment?

Yes, long term SIP is really helpful for your long-term investment because time help smooth out short-term swings and lets compounding do its work.

Can SIP amount be increased?

Yes, you can easily increase your amount in SIP and for this you can use flexible SIP

Can I stop my SIP?

Yes, you can easily stop your SIP amount anytime.

Is SIP return fixed?

No, it is not fixed because In SIP your amount is invested in several sectors, and the return also fluctuates according to the Market trends.