Perpetual SIP: Should you go for one while investing in mutual funds?

While investing in a mutual fund scheme through systematic investment plan (SIP) mode, you get the pre-defined option for how long you want to continue your investments – 3 years, 5 years, 10 years, or perpetual? It means opting any of the options will let your investments amount disbursed from your bank account through ‘electronic clearing service’ or ECS mode for that particular time and will automatically get stopped as per the decided time you opted for it. However, while opting a perpetual option, your investments will continue for the lifetime. If you want to stop a perpetual SIP, you have to fill up the SIP closure form and submit it to the AMC.

“Perpetual SIPs refer to those with no tenure end date. Most fund houses assume such SIPs to continue till 2099 unless you give specific instruction to stop them. These SIPs are aimed at ensuring continuity and investment discipline for those who are too busy or too undisciplined to renew their SIPs,” said Manish Kothari – Director, Mutual Funds, Paisabazaar.com.

When to opt for perpetual SIP

Opting for this mode of investment should be done cautiously because it also requires you to monitor your funds’ performance from time to time. It is so because most investors fail to watch their fund’s performance and eventually, loose returns over the long-run.

Kothari said that as the performances of mutual funds can deteriorate for various reasons, such as changes in fund management or investment objective, a perpetual SIP without regular monitoring would lead to continued investments in an underperforming fund. “One should opt for perpetual SIPs only if he or she is able to review the performance of his funds at least once a year,” he said.

When not to opt perpetual SIP

Although SIP’s are highly flexible in nature and can be stopped and restarted as per your convenience, it makes little sense to start perpetual SIP’s close to or after your retirement, as it’s quite likely that you won’t be continuing with the SIP’s for an extended period of time.

“Once you retire, you’ll need to realign your portfolio in order to reduce risks and volatility, and will most likely have to start drawing upon the accumulated corpus regularly or frequently. In fact, you may need to start SWP’s or Systematic Withdrawal Plans, which are in effect the reverse of SIP’s, once you retire and don’t have a steady source of income to fall back upon,” said Mayank Bhatnagar, COO – FinEdge.

The best way to go for an SIP in mutual funds

The best way to do a SIP in a mutual fund is to link it to a tangible, well defined financial goal. This simple act will ensure that your SIP continues for long enough to compound and create value. You can also select the exact date to start and stop an SIP while filling up your mutual fund investment documents instead of selecting the predetermined date or perpetual mode.

Bhatnagar said that the process of linking your SIP’s to your financial goals ensures that you automatically invest in an asset class that’s appropriately suited to your time horizon. “Additionally, it’s important to not try and ‘time’ your SIP investments, but rather let the markets take their own course by allowing your SIP instalments to get debited in a disciplined manner. In doing so, you’ll end up benefiting from the inevitable ups and downs of the markets,” he said.