Mrin Agarwal, Founder & Director, Finsafe, says “top-up SIP is something that everybody should have on their regular SIP because with the top-up SIP, when you actually increase the amount that you are investing every month, you are actually in a long period of time due to the compounding factor you are going to see a very good growth in your investment.”
Let us start with types of SIPs.
Yes, there are seven different types of SIPs. The first one, of course, being the regular SIP where you invest every month a fixed amount and this amount could be done on a monthly, bimonthly, quarterly or half yearly basis and you have the option to choose the date. You have daily SIP and you have weekly SIP as well. So, you have the option to choose the date of the SIP, so that is the simple one.
The second one that you have is the top-up SIP. So, as the word connotes, it basically means that you are allowed to increase the allocation into the SIP on a periodic basis. For example, on a yearly basis. So, right now if you have an SIP running for 10,000, you can say that I would like to top it up by 10% every year and what it means is that after one year your 10,000 SIP will automatically start becoming 11,000 is what is going to start getting deducted.
Then, you also have flexible SIPs which allow you to make some changes to your SIPs. For example, you could decide to increase the amount. You could decide to reduce the amount based on various factors. So, for example, if you feel that the markets are down right now, you could say, okay, I want to put in more money. But if you feel that maybe you have a liquidity issue, then you might say that I would like to decrease the SIP amount. The only thing to keep in mind out here is that whatever changes you intend that you want to do, you need to inform the fund house one week prior to the SIP date.
Then there is the most interesting one, which is the trigger SIP, which a lot of people are asking about these days considering the markets that we are in, which is in trigger SIP an additional amount gets triggered into the SIP based on certain conditions happening and this trigger could be price-based, time-based, or valuation-based. So, when you are looking at price-based, it means you say that if the NAV crosses an X amount, say Rs 1,000, then I would want the trigger SIP to start. So, basically only when there is a trigger and if the NAV falls below that particular trigger amount, as I said, Rs 1,000, then you will say that you want an additional amount to be put in.
In time trigger, for example, people could say that they want to invest a lump sum amount on the market correcting a particular percentage. It could be 5%, it could be 10%, so they can define that.
Then there is the valuation-based trigger, where based on a certain valuation parameter, for example, PE ratio, so if the Nifty or Sensex or a particular benchmark index falls below a particular valuation level or threshold, then they want to increase the SIP contribution by a predefined amount. So, there are various factors in this.
Of course, there are perpetual SIPs, which as the name suggests are for perpetuity. You can redeem them anytime, but they do not have a fixed tenure and then you have multi-SIPs where in one fund house you can sign up for multiple funds at the same time and so that is very convenient in case you have decided that you only want to do with this particular fund house all your SIPs.
Finally, you have SIPs with insurance where you have a term insurance cover. Each fund house has it differently. Some of them give you 10 times the first SIP amount and then it increases. Of course, all of them have a cap on the amount of insurance which is typically Rs 50 lakh and it is a term policy and, of course, this feature is available only on equity mutual funds.
I also want to understand along with having a regular SIP, can investors also opt for these other kinds of SIPs that you just explained? Is it possible?
Yes, you can.
And how would you strategize that?
Firstly, everything depends upon two-three factors. Of course, we are assuming that everybody has a time horizon but it also depends upon the sort of risk that you want to take and how active you really want to be. So, for example, since a lot of people are looking at trigger SIPs at this point in time, I think basically trigger SIPs work well for people who are aware of market dynamics and who want to really look at this as a tactical allocation that they want to do into the market. So, the trigger SIP is meant for more evolved investors,.
Of course, top-up SIP is something that everybody should have on their regular SIP because with the top-up SIP, when you actually increase the amount that you are investing every month, you are actually in a long period of time due to the compounding factor you are going to see a very good growth in your investment.
Just to give you an idea, for example, if you are doing Rs 25,000 per month for 10 years and we are assuming a 12% return, then in a regular SIP you have invested Rs 30 lakh and your value is going to be somewhere around Rs 60 lakh after 10 years. But in a top-up, if you say that I am going to increase this amount by 10% every year, then you have invested somewhere around Rs 48 lakh, but the amount that you are actually going to end up with is also much higher around Rs 85 lakhs. So, some of these SIPs are really good in helping you increase your corpus in an easier way, like the end corpus in a way that is easy for you to do as well.
Let us also talk about certain kind of myths that revolve around SIP. So, I first want to understand wheter there are specific dates on which you can do SIPs. Or is it just a myth and there is nothing like that?
Yes, you can do daily SIP, you can do it on 1st, you can do it on 10th, yes you can do it on 25th and all. But when you look at the historical data, it doesn’t really matter. I think especially for people doing daily SIP, I am not in favour, I think it is is basically trying to do too much risk management.
What are the tax related implications? You are investing in equity mutual funds or investing in debt mutual funds, even in equity if you are investing in an ELSS, you have a three years lock-in. How does the tax implication work on your SIP across these categories?
It works on a FIFO method, which is first in first out. So, whatever you invested first, in a chronological manner whatever you invested first is going to be taken as the first set of units that is going to be redeemed at the time when you are trying to calculate capital gains.
Could you also explain to us the small difference between a lump sum and an SIP investment?
Yes, sure, and also just adding on to the last point, like in the ELSS many people believe that it is there the three-year lock in but there is a three-year lock in from the date of the SIP. It is not like PPF where you keep investing and then you have one final maturity date. So, every date that you do the SIP, there is a three-year lock in from that date and again even for the regular schemes where the long-term capital gains kicks in after one year, so one year from the date of investment of each instalment is how the tax gets calculated.
It is a little complicated, but honestly the capital gain statements are available from the registrar and transfer agent, so it is not going to be that difficult for investors. Now, where SIP and lump sum is concerned, lump sum is investing a fixed amount in one shot, whereas SIP is investing a fixed amount every month into a particular mutual fund scheme. It could be equity, it could be debt. So, the difference is really about can you really invest all that capital right now or would you like to do it over a period of time.
So that will be all the benefits of doing SIPs and most importantly, types of SIPs and not to forget, no matter the volatility in the market, one should not be stopping their SIPs?
Yes, absolutely and again I would like to reiterate that a top-up is something that everybody should look at. But, for the rest of the SIPs, it really depends upon your convenience. Again, perpetual SIP works because there are cases where people forget to renew their SIPs and, of course, flexi SIPs provide you some convenience and so do multi-SIPs.
To be honest, I am not in favour of SIPs with the insurance plan because the term insurance cover is going to be there only till the time you are invested in that particular fund. You are better off taking a longer-term term insurance cover outside and then doing your SIP. Of course, that is going to cost you, here it is coming free of cost to you. But, the main thing to remember is that if you still find it difficult to do all of this, the regular SIP is good enough.