What are the Types of SIPs Available, and How are SIP Returns Calculated?

Types of SIPs

Systematic Investment Plans (SIPs) have become a popular investment vehicle for individuals looking to build wealth over time through disciplined investing. SIPs allow investors to contribute a fixed amount regularly into mutual funds, thus offering a convenient and effective way to invest in the market. Understanding the types of SIPs available and how returns are calculated can help investors make informed decisions.



Types of SIPs Available


1. Regular SIP: This is the most common types of SIP where a fixed sum of money is invested at regular intervals (e.g., monthly or quarterly). It offers the benefit of rupee cost averaging, reducing the impact of market volatility over time.


2. Top-up SIP: Also known as step-up SIP, this plan allows investors to increase their investment amount periodically. For example, an investor can start with an investment of INR 5,000 per month and increase it by a certain amount each year. This types of SIP helps investors gradually increase their investment in line with their growing income.


3. Flexible SIP: As the name suggests, flexible SIPs provide the flexibility to change the investment amount or skip contributions based on the investor’s financial situation. This is particularly useful for those with irregular income or fluctuating financial commitments.


4. Perpetual SIP: Unlike regular SIPs that have a predetermined tenure, perpetual SIPs do not have an end date. Investors can continue investing until they decide to stop. This ensures that the investment process continues seamlessly without the need to renew the SIP mandate.


5. Trigger SIP: Trigger SIPs allow investors to set specific conditions (triggers) for their investments. For instance, an investor can set a trigger to invest a certain amount when the market reaches a particular level or when the NAV (Net Asset Value) of the fund hits a specified value. This types of SIP is suitable for investors who wish to take advantage of market movements.


6. Goal-based SIP: These SIPs are aligned with specific financial goals such as buying a house, funding children’s education, or planning for retirement. The investment amount and duration are determined based on the target goal, making it easier for investors to track and achieve their financial objectives.



How SIP Returns are Calculated


Calculating SIP returns can be a bit complex due to the regular and periodic nature of the investments. Here are the common methods used:


1. Absolute Returns: This is the simplest method, calculated as the difference between the final value and the initial investment. However, it does not account for the time value of money or the periodic nature of SIPs.

Absolute Return= Final Value – Initial Investment / Initial Investment × 100


2. Compounded Annual Growth Rate (CAGR): CAGR provides a smoothed annual return rate over a given time period. It accounts for the effect of compounding and is a more accurate measure of performance for

SIPs.CAGR = (PV/IV) 1/t – 1
PV = Present Value (realized value of the investment)
IV = Initial value of the investment
t = Time for which the Initial Value (IV) was invested


3. XIRR (Extended Internal Rate of Return): XIRR is the most suitable method for calculating SIP returns as it accounts for the irregular cash flows associated with SIP investments. It considers the timing and amount of each installment, providing a more precise measure of performance.

XIRR is calculated using specialized financial software or Excel, where each investment and its corresponding date are input, and the XIRR function is used to determine the return.




Systematic Investment Plans (SIPs) offer a structured way to invest in mutual funds, catering to various investor needs through different types such as regular, top-up, flexible, perpetual, trigger, and goal-based SIPs. Understanding these options allows investors to choose a plan that best aligns with their financial goals and risk appetite. Additionally, being familiar with how SIP returns are calculated—using methods like absolute returns, CAGR, and XIRR—enables investors to accurately assess the performance of their investments and make informed decisions for future contributions. By leveraging the power of disciplined investing and the benefits of SIPs, investors can steadily build wealth and achieve their long-term financial objectives.



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