Investing in mutual funds through a systematic investment plan (SIP) has become very popular during the last few years. However, besides SIP, there are other systematic methods that serve the purpose of systematic investing and withdrawing. For instance, the Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP) can be used by investors to follow systematic planning depending on their type of investments.
If you are planning to invest in MFs, find out how these systematic plans differ, and which one should you opt for.
Systematic Investment Plan (SIP)
Systematic Investment Plan is a disciplined way of investing in MFs. The Association of Mutual Funds in India’s (Amfi’s) ‘Mutual Fund Sahi Hai’ campaign along with demonetization, has increased the popularity of SIPs over the last few years. However, many investors — including those who have already made investments through SIP in mutual funds – are still confused about SIPs.
With an objective to build a corpus, an investor chooses to invest a fixed sum of money over time through SIP. Experts suggest, with a long investment period investors get the benefit of averaging their cost of purchase. This balances the risk of your investments. By not putting all your money at a market peak, it maximizes returns. To build a corpus through a SIP, you can invest small amounts of money over time. You can choose the frequency of the SIPs – it can be daily, weekly, quarterly, monthly, or yearly.
Investors planning to invest through SIP will get the best benefit if they invest in equity funds through SIPs instead of debt funds, as they are normally typically less volatile than equity funds.
Systematic Withdrawal Plan (SWP)
Systematic Withdrawal Plan is just the opposite of Systematic Investment Plan. As an investor, you get the option to withdraw a fixed sum of money from a fund at regular intervals, under the Systematic Withdrawal Plan. An investor needs to invest a lump sum amount firstly in a fund. Then the investor can opt for transferring a fixed amount at regular intervals through SWP. Simply put, through SWP, you invest a corpus first to withdraw a fixed monthly amount later. Experts suggest, this is mostly useful for people who have retired and are senior citizens, who are looking for a fixed flow of income and wish to get a monthly income for daily expenses. Through SWPs investors get protection from market instability and also avoid timing the market.
Systematic Transfer Plan (STP)
Investors planning to invest lump-sum should invest through Systematic Transfer Plan (STP). It helps the investments spread over a period of time and rules out the risk of getting into the market at its peak. With Systematic Transfer Plan, you can invest a lump sum in a fund, generally a debt scheme, and then transfer a fixed amount regularly to an equity scheme. Simply put, investors can earn a little extra on their lump sum investment while transferring it in equity. However, an STP can also be done the other way around, from an equity fund to a debt fund.
An investor should decide the period over which they want to transfer the money from one scheme to another, depending on the lump-sum amount. However, the larger the amount, the longer the time period.
