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De-jargoned: perpetual SIP

A perpetual SIP is one in which there is no end date

Retail investor interest in the equity market has been increasing, and many have chosen to go with equity mutual funds. According to the Association of Mutual Funds of India data, retail mutual fund folios for equity-oriented schemes, which fell in the previous year, rose 7.6% for 2014-15 (as on March 2015) compared to last year. Systematic investment plans (SIPs), as an option for long-term investing, are also gaining in popularity. One way to take advantage of SIPs in a true long-term manner is opting for a perpetual SIP. Here is how it works.

WHAT IS A PERPETUAL SIP?

A simple SIP is one in which you choose to make periodic investments in a scheme of your choice at regular intervals. You have to select the SIP option at the time of applying for the investment, and then select the frequency of the periodic investments (daily/weekly/monthly/quarterly) and, lastly, enter the start and end dates.

A perpetual SIP is one in which there is no end date. So, to make your SIP perpetual, you can leave the end date blank and most fund houses will assume that it will continue till December 2099. Some will expressly require you to pick the ‘perpetual’ option.

If at a later date you wish to discontinue your perpetual SIP, you can do so by sending a written communication to the fund house.

SIPs effectively reduce volatility in long-term equity investments and help you make invest regularly without timing the market. Perpetual SIPs go one step further. These help synchronize long-term goals through regular instalments. You don’t have to attend to renewing such SIPs; fund houses allow you to top-up the investment amount whenever you want.

WHAT TO WATCH OUT FOR?

If you invest through an online broking site, you will have to check whether it offers this option. Many websites offer investors the choice to pick the number of instalments, which can go up to 25-30 years.

It’s simpler if you invest through the asset manager as you will be able to choose the perpetual option or leave the end date blank in the application form. However, here you have to be mindful to synchronize your bank electronic transfer mandate accordingly.

Practically, a perpetual SIP is more beneficial if you are starting early. For example, a 30-year-old will benefit more from a perpetual SIP than someone who is, say, 50 years old. This is because the 30-year-old can continue the SIP for at least 30-35 years without disturbing the investment flow.

Another factor is picking the fund itself. You have to choose your long-term investments carefully, especially if you are investing in an active fund. For example, if the fund manager of the scheme moves out after five years, you would want to reconsider the perpetual SIP. The fund’s performance can also fluctuate over a period of time, and you will have to review these factors regularly. Alternatively, such SIPs would be effective for passive funds where these risks aren’t as relevant and the decision is more about your allocation to equity assets.

Perpetual SIPs can help in long-term planning but not many would want to continue their equity SIP into old age and that defines an outer limit to the SIP time line. If you don’t want to go through the hassle of renewing an SIP every year or two, you could also match the tenor with your long-term financial goals.

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