What is Equity SIP – Meaning, Types, Taxation, Features, and How it Works
Stock markets are volatile and can make big moves in either direction in a short span of time. When you invest a lumpsum amount, and if the market moves down suddenly due to some adverse event, you can lose money. To overcome this situation, you can make small investments regularly every month through the systematic investment plan (SIP) mode of investment. This article focuses on what is equity SIP – Meaning, types, taxes, features, and how it works.
What is an equity SIP?
An equity SIP or equity systematic investment plan is a mode of regularly investing in equity mutual funds. For example, Ramesh has started a monthly SIP of Rs. 5,000 in a Nifty 50 Index fund for a tenure of 5 years. In this case, Ramesh's bank account will be debited by Rs. 5,000 every month on a specified date for the next five years. The money will be invested in the Nifty 50 Index fund scheme that Ramesh has selected. Ramesh's folio will be credited with the scheme units equivalent to the monthly SIP amount.
An equity SIP is one of the best ways to make regular and disciplined investments towards one's financial goals and achieve them.
Types of equity SIP
There are various types of SIPs provided by mutual fund houses. Some of these include:
- In a regular SIP, the investment amount, the investment date, and the investment tenure are fixed and have to be specified at the time of starting the SIP. These parameters stay constant for the entire SIP tenure and cannot be modified. A regular SIP is the most basic type of SIP. When AMCs started offering SIP first, they all started with regular SIP.
- Over time, investor preferences have changed. AMCs have taken note of the changing investor preferences and have started offering different types of SIPs in addition to regular SIP.
- A flexible SIP allows investors to change (increase or decrease) the SIP amount whenever they want. The flexible SIP feature is useful for self-employed investors or business persons. In their case, the monthly cash flows are uneven. In some months, the cash flows are high, and in some months, they are low. So, in months where the cash flows are low, the investor can request the AMC to reduce the SIP amount.
- The investor needs to inform the AMC about the change in the SIP amount before a specified time. For example, the AMC may require the investor to inform them about the change in SIP amount at least seven days before the SIP date to have enough time to modify their systems to accommodate the change in SIP amount.
- With flexible SIP, some AMCs may also allow the investor to change the monthly SIP date or the SIP frequency (weekly, monthly, quarterly, etc.).
- A perpetual SIP has only a start date and no end date. It means the SIP will continue forever (in perpetuity). The investor can choose to pause the SIP or pause and redeem the accumulated amount at any time. A regular SIP in which an investor forgets to input the end date becomes a perpetual SIP automatically. Perpetual SIPs usually have an end date of 2099.
- A step-up SIP allows you to increase your monthly SIP amount by a specified amount every year. For example, Ramesh has started a monthly SIP of Rs. 5,000 in a Nifty 50 Index fund for a tenure of 5 years. He has opted to increase the monthly SIP amount by Rs. 500 every year. In this case, in the 1st year, the AMC will debit his bank account with Rs. 5,000 every month; in the 2nd year, it will be Rs. 5,500 every month; in the 3rd year, it will be Rs. 6,000 every month, and so on.
Advantages of Equity SIP
An equity SIP is an excellent way of investing in a disciplined manner for financial goals. It brings financial goals well within reach, which is the key to achieving financial freedom.