Types of SIP
You are convinced of going the SIP route for wealth creation. You are also aware of the beauty of averaging and the magic of compounding. But wait, what kind of an SIP would you start? That depends on your financial goals.
The most preferred SIP used by investors is a Fixed SIP, where one can choose to put in a set amount at a regular interval. Mutual fund companies give investors the option to invest on a weekly/fortnightly/monthly/quarterly basis.
This type of SIP allows one to increase the SIP amount at a regular interval. It gives individuals the flexibility to step up the contribution when the mutual fund scheme they have invested in is performing better, and when their income increases.
This kind of SIP allows individuals to tweak the amount they want to contribute. In case of a cash crunch, they have the option of informing the fund house to stop SIP payments till financial conditions improve. Alternatively, one can choose to increase contributions when they have a surplus. The information to alter the SIP investment amount needs to be given in advance.
This type of SIP should be considered only if one can read the pulse of the market. It gives you the option to set the SIP start date or redeem funds as per a selected market event, NAV or index level. However, one needs to be cautious while selecting this kind of SIP and go for it only if their understanding of the market is extensive.
Usually, when one starts an SIP investment, they need to specify its tenure - one/three/five years. A Perpetual SIP does not have a specified tenure. Once financial goals have been achieved, one can stop the SIP.
So what kind of an SIP are you planning to start?