Systematic Investment Plan
Systematic Investment Plan (SIP) is an option where you invest a fixed amount in a mutual fund scheme at regular intervals. For example, you can invest 1,000 in a mutual fund every month. It is a disciplined investment plan and helps reduce propensity to market fluctuations. It is a convenient tool that helps you preserve capital and also render significant wealth creation in the long-run.
SIP investments can help you reach your financial goals by taking advantage of rupee cost averaging, and growing your investments with compounded benefits.
Advantages
SIP has several advantages over one-time investment. Some of the advantages are mentioned below:
- Disciplined approach to investments
- Flexibility to invest small amounts every month
- Benefit from the power of 2 powerful investment strategies
- Rupee cost averaging – helps counter volatility
- Power of compounding – small investments create a big kitty over time
- Convenient and hassle-free mode of investment
- No need to time the market
Rupee Cost Averaging
Rupee Cost Averaging is an effective mechanism which helps in eliminating the need to time the market. Under this method, one need not be concerned about when and how much to invest. A fixed sum of money can be invested regularly and over time it averages out the costs. Say, you invest 1,000 a month, and, the price of the selected mutual fund scheme unit is 10 in the first month, you will get 100 units.
In the next month, if the unit price falls to 9, you are allotted 111 units. In the third month, if the price drops further to 8, it can get you 125 units. Thus, by investing 3,000 over three months, you will get 336 units.
On the other hand, had you invested the entire amount in the first month itself, you would have gained just 300 units. In case of SIPs, the average unit cost is about 8.9 as compared to 10 in case of lump sum investments. Thus, SIPs help lower the average unit cost and can buy you more units.
Power Of Compounding
You can gain from compounding by reinvesting the money you earn from your investments to earn even more. The earlier you start, the longer your money has the opportunity to compound and enhance your corpus helping you achieve your financial goals.
Below is an example for a SIP of 1,000 invested per month @8% till the age of 60.
Thus, the power of compounding can have a considerable impact on your wealth accumulation, particularly if the investment is for a long period of time.
Convenience of Investment
Register for SIP by signing up the required forms of periodic investments (monthly/quarterly) based on your suitability. Your account will be automatically debited on the requested date to purchase the units of the required fund.
SIP is a simple, convenient and affordable way to invest for your future. With as little as 1,000 every month, it’s an effective method to invest in the growth potential of Mutual Funds.
Systematic Withdrawal Plan (SWP)
An SWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals. It allows investors a certain level of independence from market instability and helps in avoiding market timing. The investor can reinvest the redeemed cash in another portfolio or use it as a source of regular income.
Advantages
Regular Income - SWP helps in creating a regular flow of money from investments on a periodic basis i.e. on a monthly or quarterly basis.
Tax Benefit - Instead of selling all the units at once, spanning the income across multiple intervals can lower the total tax. It is a tax efficient way of receiving regular income.
Avoid market fluctuations - It saves an investor from market fluctuations, as regular withdrawal averages out return value.
How does an SWP work?
An SWP allows you to withdraw a fixed sum of money every month or quarter depending on the option chosen and instructions given by you.
Lets say Ashish has 10,000 units in a mutual fund scheme on 1-Dec-11. He intends to withdraw 6,000 every month through SWP.
In this manner, units from mutual fund holdings will be redeemed in a systematic way to provide the investor with regular income.
Types of SWP
Fixed Withdrawal: In a fixed withdrawal option, the investor specifies the amount he wants to withdraw from his investment on a monthly/quarterly basis.
Appreciation Withdrawal: In an appreciation withdrawal option, the investor withdraws only the appreciated amount on a monthly/quarterly basis.
An SWP can help investors who require liquidity as it permits them to access their money precisely when they need it to meet their needs.
Systematic Transfer Plan (STP)
An STP is a plan that allows investors to give consent to a mutual fund to periodically transfer a certain amount / switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house. Thus at regular intervals an amount/number of units you choose is transferred from one mutual fund scheme to another of your choice. This facility thus helps in deploying funds at regular intervals.
Advantages
Consistent Returns – Through STP, you can transfer your money to a target equity fund while you are invested in a debt or liquid fund. Therefore, you will get the returns of the equity fund you are transferring into and at the same time remain protected as a part of your investment remains in debt.
Averaging of Cost – Like SIP, in STP too, a fixed amount of money is invested in the target fund at regular intervals. Since it is similar to SIP, STP assists in averaging out the cost of investors by purchasing more units at a lower NAV and vice versa.
Rebalancing Portfolio – STP facilitates in rebalancing the portfolio by allotting investments from debt to equity or vice versa. If your investment in debt increases money can be reallocated to equity funds through an STP and if your investment in equity goes up money can be switched from an equity to a debt fund.
How does a STP works?
The investor needs to select a fund from which the transfer should take place and a fund to which the transfer is taking place. Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen and the options available with the AMC.
If an investor chooses to transfer from a liquid fund to an equity fund, the lump sum is invested in a liquid or a floating short-term plan and is transferred at regular intervals to a specified equity fund. For example, if one has 50,000 to invest in equities; he can put the entire amount in a liquid plan and go for a monthly SIP of 5,000 in an equity plan through an STP.
STPs can carry Exit Loads as per the respective schemes of the AMC
Type of STP
A Systematic Transfer Plan is of three types; Fixed STP, Capital Appreciation STP and Flexi STP.
Fixed STP – In Fixed STP, the investor takes out a fixed sum of money from one investment to another.
Capital Appreciation STP – In Capital Appreciation STP, the investor takes the profit part out of one investment and invests in the other.
Flexi STP– In Flexi STP, the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.
Thus, STP is particularly suitable to investors who have lump sum money and wish to invest in equity funds but are wary of timing the market. They can then choose to park the lump sum money in a liquid or debt fund and use the STP option to systematically transfer a fixed amount of money at regular intervals into the target equity fund.
Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing.