Different types of mutual fund SIPs in the market

Let us understand the different types of mutual fund SIPs, which can be used for the purpose of wealth creation.

Oct 15, 2019 09:10 IST India Infoline News Service

With the AMFI reporting SIP collections in excess of Rs8,200cr per month, these systematic investment plans are here to stay. SIPs represent long term equity savings and genuine retail participation in the equity markets. From a wealth creation perspective, that makes a lot of sense. But the benefits of a SIP are much more than that.
 
A SIP builds in people the discipline to save and productively invest for the future. SIPs on equities are extremely powerful in converting small savings into a large corpus. Secondly, since SIPs are phased out, they bring the advantage of rupee cost averaging; over time it reduces your average cost. Lastly, SIPs help sync your outflows with inflows. Since your inflows in the form of salary, commissions or even interest is periodic; it is only natural that your outflows should also be periodic. More importantly, SIPs offer a wide palate.
 
Plain vanilla regular SIP
 
This is the simplest form of SIP investing.  You typically set up a date for contributing to the SIP each month. Set a date when you are confident that your salary or commission will be credited into your bank account. The SIP can be of the amount of your choice and technically can be as small as Rs500 per month. In case you set 10th as the date for the SIP, then on that date the amount gets debited and equivalent units of the fund are allotted to you. The actual date is not too relevant as long as you maintain the discipline.
 
Stepped up SIP or Top-up SIP
 
One of the realities of professional life is that your income tends to grow over a period of time. So, you cannot be sticking to the old savings year after year. One way is to review your SIP requirements each year and add new SIPs based on your surplus. A more automated way is to opt for a Stepped up SIP. In this SIP, you commit to increase the SIP contribution by a certain amount each year and then that SIP amount continues for a full year. This step-up can be fixed in rupee terms or in percentage terms, but the idea is that there is an automated solution to invest more as you earn more.
 
Balloon SIP for interim payments
 
When you are in a job or a profession, there are two components to your income; fixed income and variable flows based on performance. How do you ensure that you do not splurge your bonuses and incentives? The answer could be a balloon SIP. In a balloon SIP, you build an annual bullet payment around the time of your bonus. So the SIP continues for the full year and in the month you get the bonus you structure a lump-sum balloon contribution. Of course, you can also do this manually, but a balloon structure ensures discipline since you will only spend the balance amount.
 
Solution based SIP for planning
 
Quite a few mutual funds also customize SIPs in such a way that you can have a SIP solution where the allocation is done by the fund based on your long term goal requirements. Normally, you define your goals and then structure SIPs accordingly based on tenure of goal and tag these SIPs to goals. Now if your equity / debt / cash mix is 60:35:5, then you can have a solution based fund and structure a SIP on that solution accordingly. The only risk is that such solution funds are structured as Fund-of-Funds (FOF) and entail higher costs.
 
SIPs with in-built withdrawal facility
 
This facility is very useful to combine the benefits of SIPs both ways. Broadly, there are two such combinations. Firstly, if you receive a lump-sum, you can invest the sum in a liquid fund and swipe a fixed sum into equity funds each month. The liquid fund gives you better returns than a bank and the SIP ensures lower average cost.
 
The second way is to combine a systematic withdrawal plan (SWP) with an SIP. You run equity SIP for 15 years and then from the 16th to 20th year withdraw systematically from this corpus. This withdrawal is done by shifting the corpus to a liquid fund. The SWP is more tax efficient and also does not entail exit loads. That is like hitting two birds with one stone.
 
SIPs offer a really wide platter and the choice is yours to make.

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