Investors have taken to investing via SIPs in a big way as Indian mutual funds touched a total of Rs 1.73 crore (17.3 million) SIP (Systematic Investment Plan) accounts in October this year. According to AMFI data, an inflow of Rs 34,887 crore came into the mutual funds via SIPs in the first seven months of 2017-18. What’s propelling the growth in SIP investments? Experts say retail investors have found SIP to be more convenient and relatively safer way of participating in equities. Further, many small investors find SIP attractive as they could put in monies as low as Rs 500 per month. However, can the investors also benefit by using a variant of SIP i.e. a Systematic Transfer Plan? In a systematic transfer plan (STP), the investor instructs the mutual fund to regularly redeem/switch units from one fund and invest in another fund of the same fund house on a monthly, fortnightly or a weekly basis. We take a look at three key benefits of using such a plan-
Earn higher interest on lump-sum investments
In case of a big bonus or any other lump-sum gains, investors may opt for a STP instead of locking the amount into an FD or putting the entire sum into equities, to mitigate risk. Investing the entire amount in one go is not advisable as you can never predict tops and bottoms in the market. The investors may opt for a safe liquid fund to transfer the entire sum, and transfer the amount to equity mutual funds in a systematic manner over a two to three year period. “The advantage is that your entire corpus is parked in a liquid fund and hence your money is not sitting idle. It is actually earning a rate of return that is higher than what you would be earning on your savings bank account with the benefit of 100% liquidity,” says an Angel Broking report.
Rupee Cost Averaging
Just like a SIP, STP provides a Rupee Cost Averaging benefit. The entire idea is based on the premise that investing in a disciplined manner without worrying about the market volatility and timing will yield superior returns. “Instead of investing a lump sum amount, say Rs.7 lakhs in lump-sum you are breaking up the corpus into Rs10,000/- per month and creating a quasi-SIP. Your average cost is likely to be lower than your lump-sum cost in normal circumstances,” says Angel Broking.
Long-term wealth creation
STPs help to constantly tweak the debt-equity mix, in a systematic manner, thus aiding the investors for long-term wealth creation. “Your lump-sum is earning more than your savings bank account as it is invested in a liquid fund. At the same time, the transfer into an equity fund each month is also working towards your long term wealth creation,” says Angel Broking.