How to choose the right SIP type

Systematic Investment Plan (SIP) is an important element of any investment world. Through this approach, an investor can invest in a mutual fund in a systematic and periodic manner. The idea of SIP is analogous to a recurring deposit where you amount a small/fixed amount every month. SIP is an easy and smart mode of investing in mutual funds. Read on to understand the reasons to invest in SIP, the types of SIP in the market and approaches for perfect SIP investment. 

 

Why should one invest in SIP mode?

 

Disciplined saving: As a result of SIP, you agree to save on a regular basis which in turn brings discipline in your investment approach.

 

Rupee cost averaging: In contrast, the approach of investing a fixed amount periodically iron out the volatilities of the market and cut back timing risk.

 

Power of compounding: A small amount of money you accumulate over a long period of time with compounding interest can bring you a large income.

 

Flexibility: In contrast to other investment methods, SIP offers the chance to modify the amount that one is putting in.

 

Accessibility: SIP can be started with an amount as low as Rs. 500, which in turn makes it affordable for all.

 

Types of SIP are available in the market

 

Regular SIP: This is the most widespread type of SIP where a fixed amount is transferred from the account on a particular date every month.

 

Flexi SIP: This means that you can adjust the invested amount as per your own choice through this SIP.

 

Perpetual SIP: In this particular SIP, there is no specific end period and continues until the investor ends it.

 

Trigger SIP: With this SIP one can define an event like an index level or a specific date, and when the event arrives the money is invested.

 

Now, how to select the correct SIP type?

 

Understand your financial objectives: Every investment should be goal-oriented. Your financial objectives might include purchasing a home, saving for your child's higher education, or establishing a retirement fund. Each objective may necessitate a different investing approach and, hence, a distinct sort of SIP. For example, if you are investing for long-term goals like retirement, you could choose an equity-oriented SIP, but short-term goals may be better served by debt funds.

 

Assess your risk appetite: Risk tolerance is an individual trait that varies from person to person. If you are a risk-averse investor, you may select debt fund SIPs, which offer consistent but lower returns. If you are willing to take on more risk in exchange for possibly larger returns, you may want to consider equity fund SIPs.

 

Determine your investment horizon: The time period over which you wish to invest is an important consideration when choosing the correct form of SIP. If your aim is long-term, say 10-15 years, regular or perpetual SIPs in equities funds may be appropriate. However, for short-term aims, you may want to consider debt fund SIPs. 

 

Assess fund performance: While historical performance is significant, it is not the only element to examine. Observing the Nifty Midcap 150 Momentum 50 Index will help you understand the performance of mid-cap funds. To make an educated selection, it is also necessary to compare the fund's performance over time to that of its benchmark.

 

Decide on an investment amount: SIPs allow you to begin investing with a small amount. Determine how much you can easily invest each month without hurting your budget. This discipline of making consistent and reasonable investments has the potential to generate significant wealth over time. 

 

Consider the flexibility: Flexi SIPs allow you to adjust your investment amount based on your financial position. If your income fluctuates, or if you want the flexibility to invest more when you have extra money, Flexi SIPs may be a smart option.

 

Understand the market: Knowing about the market conditions can be of great help to you make a choice between a regular and a trigger SIP. If you are confident about following all the market happenings and want to use them to your advantage, then you may choose a trigger SIP. Regular SIP can be favourable if you want to take advantage of the rupee cost averaging.

 

Look at the tax implications: Equity Linked Saving Scheme (ELSS) SIPs provide tax benefits as per Section 80C.  If you intend to invest with saving taxes in mind, this would be a viable alternative for you.

 

Consult a financial advisor: Each person's financial condition and goals are unlike anyone else's. Financial advisors can give you personalised advice, on factoring in parameters such as your income, expenses, investment goals, risk tolerance, and tax implications.

 

Review your SIP regularly: Monitoring your SIP's performance is an essential aspect of the process. This will tell you whether the investment is on target to realise your financial objectives. If you think it is necessary, you can rebalance or switch your funds.

 

Choose a reliable fund house: Choose a fund house that has a solid reputation, a sound performance history, and transparent operational practices. It can, thus, mitigate the chance of having operational and management inefficiencies.

 

Read the scheme-related documents: Be sure to read all the scheme-related papers before putting any money in. The documents will include a detailed outline of the SIP, its investment strategy, risks, qualifications of the fund manager, fee structure and other relevant information.

 

Understand the exit load and expense ratio: Exit load is an amount which is deducted from your sold units over a given period. Expense Ratio represents the annual fee the fund houses charge for the management of your investment. These costs can eat into your earnings, so it is essential to select a fund with a low exit charge and fee ratio.

 

Decide on the SIP date: The SIP date should preferably be shortly after your salary date, ensuring that you have a sufficient amount in your account. 

 

Keep your patience: Investing in SIPs is about spending time in the market rather than timing it. It takes patience because compounding, in which your earnings produce even more earnings, has a long-term effect. Remember that SIP is a long-term wealth generation instrument, and its full advantages can only be realised by consistent investments over a lengthy period of time.

 

To conclude, SIPs are an effective strategy for building wealth. However, selecting the appropriate SIP type can greatly increase the possible gains. Before investing, it is critical to consider one's financial objectives, risk tolerance, and investment horizon. Remember that the key to successful investing is picking the appropriate investment products and being consistent and disciplined in your investment strategy.