Recently I met a college friend and we were discussing about wealth creation via mutual funds. During my interaction, I discovered that he is familiar with Systematic Investment Plans (SIP) as the only tool which is offered by mutual funds.
While SIP is a common and popular form of systematic investment in parts, the concept of Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP), may not be known to everyone.
To understand the other options better, let’s understand mutual fund tools prudently so that we could use it in a better manner.
Mutual Fund options offer a variety, balancing between risk and returns, making it possible for those with low risk appetite to high risk appetite to invest.
You have to start with small steps, gradually catching pace and maintaining regularity. This disciplined fashion of investing is called Systematic Investment Plan (SIP).
One can invest in mutual funds through numerous plans such as SIP and Systematic Transfer Plans (STP) in addition to lump-sum investment. Like we invest in installments through SIP and STP, we also have choice to withdraw through Systematic Withdrawal Plan. Let us understand how these methods work.
Systematic Investment Plans (SIP)
Under this method, one invests a fixed amount in a mutual fund scheme regularly on a particular date of every month. Benefit of investing through SIP is that one does not have to time the market. There are consistent deposits which lead to investing in the high as well as low market that help you make the best out of the overall opportunities that were not easy to professionally predict in advance. The investors are required to submit onetime request for regular investment in the particular scheme of mutual fund. It is advisable for investors to invest in a staggered manner through Systematic Investment Plans for their long term goals such as child’s education, marriage etc and stay focused in their approach.
A number of advantages one has while investing through the SIP. The essential benefits being:
Systematic Transfer Plan (STP)
STP is a variant of SIP which is one of the best risk mitigation strategies of the market. The STP is a plan where one invests a lump sum amount in a particular scheme, mostly a liquid or money market fund and then transfer a particular amount to some other scheme in a predetermined interval.
This would provide the funds efficient returns from debt (instead of funds lying idle in bank account) and enable automated transfer into equity fund on a regular basis, which will reduce the downside risk significantly.
Systematic Transfer Plan is essentially a two-step investment process.
Step 1: Park the lump sum amount in liquid funds or ultra short-term debt funds.
Step 2: Transfer a fixed amount every month from the above fund(s) to the equity fund.
Because a specified amount is transferred to the equity fund at a particular interval regularly, it helps in averaging the costs of investors. Thus, saving for a long-term goal, it is ideal to use SIP in equity, which can then be incrementally moved to low-risk fixed income funds using STP.
Systematic Withdrawal Plan (SWP)
Systematic Withdrawal Plans (“SWP”), a service facility offered by a mutual fund that provides a specific payout amount to the unit holder at predetermined intervals to meet their short-term goals or regular monthly income needs. These intervals can be monthly or quarterly.
SWP is basically, reverse of SIP, where you invest a certain amount to purchase fund units. In a Systematic Withdrawal Plan, investors can decide on the amount of monthly payments they want to receive.
Each opportunity has its own benefits. As per one’s objective and circumstances, one can choose the best option and get the best out of their earning to build their dreams better.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.