The Indian stock market is currently full of optimism as the bulls are winning, the S&P BSE Sensex is at its all-time high and has reached an unprecedented level of 65,000, and the Nifty 50 Index is doing exceptionally well, starting the week strongly. It has surpassed the significant 19,000-point threshold, coming close to its all-time high of 19,996.35, set in July this year.
The Association of Mutual Funds in India (AMFI) reports that in August 2023, net inflows to equities mutual funds increased significantly, reaching a five-month high of Rs 20,245.26 crore. This was an impressive increase over the inflow of Rs 7,625.96 crore observed in July 2023.
Perhaps a notable change is happening in the background despite the stock market frenzy. NACH (National Automated Clearing House) recently issued a circular dated August 18, 2023, which states that;
“In order to bring more robustness in the process it has been decided to implement the following measures:
- The maximum period for which a mandate can be issued: A mandate can be issued for a maximum duration of 30 years starting from the date of issuance. Validation will be built into the central system to accept only the mandates that are for a duration of 30 years or less.
- Final collection date (end-date) of mandate to be mandatory: The option of ‘until cancelled’ will be removed for all categories of mandates. It will be mandatory to provide a final collection date (end-date) in the mandates.”
This announcement revolves around the National Automated Clearing House (NACH), and SIP investors must pay heed to this update, as it has crucial implications on the SIPs (Systematic Investment Plans) in mutual funds.
The NACH mandates give standing instructions to banks to deduct the SIP amount for the relevant mutual fund automatically, and NACH believes that this action will likely introduce more robustness.
At the moment, if an investor is willing to invest in a Perpetual SIP in mutual funds, they mention ‘until cancelled’ on the mandate. However, investors no longer use the ‘until canceled’ option due to the recent change. Instead, they need to specify an end date for the mandate, which must not exceed 30 years from the issuance date.
Simply put, mandates under the NACH will now have a maximum validity term of 30 years.
It is important to remember that the existing Perpetual SIPs or any Perpetual SIP opened before Sept 30, 2023, will not be affected. Since the circular will be effective from October 01, 2023, these provisions are not relevant for existing SIPs. “This is applicable for all forms (physical as well as electronic) of mandates” , clarified NACH.
Now that you have understood what the update is all about, let’s discuss what a Perpetual SIP actually is and how investors should approach it.
Long-term mutual fund investors typically choose the SIP path for their investments since it offers an organised approach. A Systematic Investment Plan (SIP) enables investors to make regular electronic investments in mutual funds.
Consequently, the tenure of SIP can vary depending on the instructions provided by the investor to the Asset Management Company (AMC). In other words, the tenure can either be pre-defined (fixed) or extended as long as the investor wants, known as a Perpetual SIP.
In this article, we will discuss Perpetual SIP and the differences between Perpetual SIP and Normal SIP.
What is a Perpetual SIP?
Perpetual SIPs don’t have a set investing period; instead, they run continuously until you choose to halt or cancel them.
Perpetual SIPs are SIPs that never expire and continue indefinitely. Since investors typically use the Electronic Clearing Service (ECS) to make auto-debit SIP payments, Perpetual SIPs won’t end until you notify your bank and the mutual fund institution.
You have the choice to specify ‘until cancelled’ or leave the end date column blank when filling out the SIP mandate form. If the column is empty, you have chosen a perpetual SIP, which will run until the year 2099.
Therefore, the Perpetual SIP will not terminate unless you give a written communication to your bank and mutual fund house to stop your mutual fund SIPs.
What are the Benefits of a Perpetual SIP?
The discipline of investing matters more than the quantity invested when considering long-term objectives over the next 20 to 25 years. The perpetual SIP will be a better product in such circumstances to assure this kind of discipline.
With Perpetual SIPs, you do not have to keep a tab on when your SIPs are expiring and intimidate the fund house about renewal dates. It also helps to maintain financial discipline by investing regularly for the long term.
However, keep in mind that since perpetual SIPs are a long-term investment, you must carefully and continuously monitor their performance. If SIPs are not meeting your requirements, you need to inform the fund house well in advance to stop the SIP.
When you invest in a mutual fund through Perpetual SIP, the fund may continue to perform well for a specific duration given the market conditions, and you stay invested. But over time, the consistency of performance may or may not continue in the long term due to the volatility in the market.
As a result, if you keep investing without keeping track of the performance of your mutual funds, you can experience losses. Therefore, it is important to monitor your funds regularly.
Difference between Perpetual SIP and Normal SIP
|Perpetual SIPs do not have a termination date and will continue for forever.
|Normal SIPs have a specific pre-defined termination date.
|Do not require renewals, so you can stay invested as long as you want.
|It requires periodic renewal, depending on your mentioned tenure.
|Perpetual SIP is also suitable for long-term investors.
|It is suitable for investors who wish to stay invested for a fixed period.
|Investors should leave the SIP termination date blank in the SIP form.
However, w.e.f October 01, 2023, one needs to mention a final date (maximum duration of 30 years or below).
|An SIP termination date is required.
Who should opt for Perpetual SIP?
Perpetual SIPs are ideal for long-term investors, especially young ones who are just in their late 20s or early 30s and who have a long investment horizon to run the SIP. It also helps avoid filling and submitting SIP renewal forms after the end of every tenure.
If one wants to opt for Perpetual SIPs, as per the new rule, investors can no longer choose the ‘until cancelled’ option. Instead, they need to specify an end date for the mandate, which cannot be more than 30 years from the issuance date.
However, if you can maintain discipline around your financial plan, then Perpetual SIPs do not add much value. On the other hand, you need to ensure that your SIPs are closed ahead of your goals. The last thing you want is some SIP debits to slip into your bank account when you have not prepared for it.
The Indian stock market may continue to ride high, but SIP investors should be aware of the new NACH mandate validity rules, which are set to come into effect on October 01, 2023.
Investment in mutual funds is a journey with long term approach. The major advantage of SIP investment, be it normal SIP or Perpetual SIP, is that you can start investing regularly with an amount as low as Rs 500/-. A SIP Calculator can be used to determine the potential amount you need to contribute consistently in order to accomplish your goals.
On the other hand, the best way to benefit from SIPs is to align them with your envisioned financial goals. Every individual has various goals, such as retirement, child’s education/wedding expenses, buying a dream house, etc. You are better off if your SIP tenure is aligned with the goals.
Having a defined financial goal and investment in a worthy mutual fund scheme through SIP gets you potentially closer to your goal. Therefore, you must align your financial goal with your investment horizon and risk tolerance levels.
This article first appeared on PersonalFN here