Mutual funds can be an effective market-linked investment option for investors among the many available alternatives in the finance market. They offer dual advantage of generating wealth in the long run while helping to save tax.
Systematic Investment Plans (SIPs) are considered as an efficient way to invest in mutual funds. They allow you to invest tiny amounts at regular intervals and help instil financial discipline. Besides, since you enter the market at different levels, you can enjoy the benefit of rupee cost averaging. i.e., it averages your purchase cost in the long run.
In this article, we look at five different types of SIPs in mutual fund to enhance your mutual fund yields.
- Top-up SIP
Top-up SIPs can increase your SIP contribution towards a mutual fund scheme instead of starting a new SIP. This can help you to reach your investment goals faster. You can specify the percentage increase in your SIP amount every year or a fixed amount in multiples of Rs.500.
- Flexible SIP
A Flexi SIP lets you change your SIP amount every month. This can be a smart option, especially if you are unsure about the funds in your bank account. Say, you fall short of funds in a particular month and can only afford a minimal SIP amount. In such a scenario, you can change the regular amount to a lower amount. However, you must remember to change the amount seven days before the SIP amount is due, else the default amount gets debited from your bank account.
SmartSIPs invest your money in equities when markets are reasonably valued. When markets are high, the SmartSIP option prevents fresh investments in equity funds. Conversely, when the markets are low, the option sells a portion out of your current equity investments and transfers it in liquid schemes. By doing so, it helps you gain decent returns and make the most from different market phases.
- Perpetual SIP
Typically, when you start a SIP, you have the option of leaving the end-date column blank. Such SIPs with an undefined tenure are known as perpetual SIPs. These SIPs are ideal for young investors in their 20s and 30s with a long-term investment horizon.
- Trigger SIP
Trigger SIP lets you set a target on a pre-specified date or at a price based on your financial goals and risk appetite.
Say, Mr. X, purchases 1000 units at a NAV of Rs.10 for Rs.10,000. He sets a trigger SIP wherein as soon as the scheme generates 20% returns, the profits are transferred to an income fund. So, whenever the NAV grows by 20%, Rs.2,000 (1,000 x 2) gets transferred to an income fund automatically.
For those looking to start their mutual fund investment journey, you can begin by reading what is a mutual fund and how to invest in SIP. Once you understand the mutual fund market and SIP investments better, you can decide the SIP type which suits your financial budget and can help you meet your financial goals sooner.