A Systematic Investment Plan is an investment strategy where you’re required to invest a particular amount of money consistently each month for a particular period of time in a fund chosen by you. An SIP allows you to be financially disciplined and helps you create wealth in the long-term.
However, when it comes to SIP investments, there are multiple different types that you can choose from. Let’s take a look at the different types of SIPs available in the market right now.
These are the most popular SIPs that many investors choose to opt for. Here, all that you need to do is select the amount of investment and the tenure. The SIP investment plan automatically invests the selected amount at predetermined intervals.
With flexible SIPs you can adjust the amount of investment and the tenure as and when you see fit. For instance, if the market is falling or if you’ve recently received a salary hike, you can choose to increase the amount of investment. These SIP investments give you more control over their workings.
With a regular SIP, you’re required to specify the tenure of the plan beforehand. However, with perpetual SIPs, you don’t have to specify any tenure at all. The plan will continue to exist till the point you manually decide to discontinue and place a request to that effect.
Step-up SIPs allow you to increase your investment amount by small increments at predetermined intervals. This allows you to stay ahead of inflation and leverage any salary hikes or increments that you may receive.
These SIP investment plans are designed to get triggered when the Net Asset Value (NAV) of the fund that you choose to invest in touches a predetermined value.
Since you invest a particular amount each month for a predetermined period of time, the method that fund houses use to calculate the SIP returns tend to be completely unique. Here’s a brief outline of how they calculate the returns.
The fund house considers each SIP investment individually. It then calculates the return of each SIP investment separately and compounds it annually. Then the average of all of these returns are calculated. This resulting average is the SIP returns and the method that the fund house uses to arrive at this return is known as the Extended Internal Rate of Return or XIRR.
As you can see, determining SIP returns is something that requires a lot of calculation and is very tough for average individuals to do. Thankfully, you don’t have to manually calculate the returns of your SIP investment plans; the fund house automatically does it for you.
So, now that you’re aware of the different types of SIPs, you should now be in a better position to choose the one that’s right for you. But before you go ahead with a Systematic Investment Plan, make sure you have a demat and trading account with you. If you don’t, simply visit Motilal Oswal to open a demat account online within just a few minutes.
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