Explained: All about top-up, trigger-based and formula-linked mutual fund SIPs

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Systematic investment plans (SIPs) allow mutual fund (MF) investors to deploy small sums in the schemes of their choice periodically, usually once every month. Apart from these regular SIPs, there are other systematic investment modes that investors can opt for.

Trigger-based SIPs

Some fund houses and MF platforms allow investors to allocate amounts to schemes at pre-defined triggers. This trigger could be either based on the movement of any benchmark index, say the Nifty 50 or any change in the value of your investment.

“An investor may not be willing to invest more when equity markets are on the decline, even though this may help to get better returns in the long-run. These automated SIPs take the emotions out of equation, so that investors can get more units when markets dip,” says Anup Bhaiya, founder and managing director of Money Honey Financial Services.

Edelweiss MF, FundsIndia and PGIM MF offer such SIPs with slight variations. For example, with the ‘Power SIP’ of Edelweiss MF, you can specify the fall in the Nifty – 0.5 percent, 1 percent or 2 percent. Once such a fall happens, the SIP amount will get debited from your bank account.

Other fund houses and MF platforms use formulas, which increase your SIP instalments if your overall investment value goes down and reduce them if the corpus appreciates.

Also listen: Simply Save | Things you did not know about SIP

A few houses use complex formulas for these trigger-based SIPs, but financial advisors suggest opting for the simpler ones that are easy to understand.

In falling markets, you would be able to buy more units. But it is not possible to predict the lowest point in any falling market. Only when equity markets recover will you get advantage of these trigger-based SIPs.

Top-up SIP

Offered by almost all fund houses, the top-up SIP facility allows you to increase your SIP investment by a certain amount, half-yearly of annually.

“There has been lot of research done on this. If you set out to increase your investments regularly right from your first salary, it not only necessitates a savings behaviour, but also gives you a much larger investment corpus,” says Prateek Mehta, co-founder and chief business officer at Scripbox.

The idea of ‘Save More Tomorrow’ in the US has been included in the Pension Protection Act. Employers are encouraged to increase the savings of their employees as their incomes rise.

You can always increase your SIPs on your own.  Mehta says that research shows people avoiding such actions due to inertia.

The top-up facility automates the whole process for you, so that there is no chance of skipping it.

So, if you want to increase your MF investments along with your annual hikes, this facility is helpful.

SIPs with insurance

Some fund houses give you life insurance cover along with your SIPs, but with certain conditions.

For example, PGIM MF offers a cover of 20 times your SIP monthly investment in the first year, 75 times from the second year and 120 times from third year.

So, if you run an SIP of Rs 10,000, you will get a cover of Rs 2 lakh in first year, Rs 7.5 lakh in the second year and Rs 12 lakh from the third year.

ICICI Prudential MF, Aditya Birla Sun Life MF and Nippon India MF also offer these covers in mildly varying formats. With these fund houses, if SIPs are stopped after three years, the cover will adjust to the market value of the investment.

The SIPs and investments need to continue for at least three years with all the fund houses; otherwise, the cover will cease to exist. Any switches, partial or full redemption, before three years, will also lead to cancellation of your cover.

Investors with large SIP investments and the ability to stay for three years without withdrawals, can get good coverage from these plans. However, for retail investors, the coverage may not be enough.

They would still need to opt for a separate term cover to get themselves adequately insured.

The maximum cover that can be availed is Rs 50 lakh. But your SIP amount should be nearly Rs 41,000. This may not suit everyone’s financial plan.

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