Mutual funds have emerged as one of the most popular asset classes among investors looking to build wealth for essential life goals. In 10 years, assets under management of the Indian mutual fund the industry witnessed a three-fold increase, growing to Rs. 23.93 trillion as of April 30, 2020, from Rs. 8.09 trillion on April 30, 2010.
Mutual funds have become popular with the masses due to their nature of catering to everyone\’s needs, be it a small investor or someone having huge lumpsum availability to invest. it\’s this flexibility of investment, along with the mutual houses\’ being professionally managed by professionals, and campaigns such as \”Mutual Funds Sahi Hain\” has bolstered its popularity. While there are several components of this asset class, this blog will focus on three widely used ‘Ss’ in the mutual fund parlance. Let’s get started.
Systematic Investment Plan (SIP)
A systematic investment plan or SIP, as it’s widely known, is a mode of investment in mutual funds where you invest a fixed amount in your chosen fund at a pre-defined interval. Though most SIPs are monthly, many fund houses offer you the flexibility of opting for daily, weekly, bi-monthly, or quarterly SIPs.
You can give standing instructions to your bank, and the bank will deduct the amount from your account on the specified date. Bringing discipline into investments, SIPs help you better ride the market the volatility associated with equity mutual funds and build a corpus for goals such as children’s higher education, their marriage, and retirement.
If you are investing Rs. 40,000 every month when NAV is 20, you are buying 2000 units every month. If the NAV dips to 16, you end up buying 2,500 units. So you tend to benefit by buying more units at a lower price. If the NAV increase to 25 in a bull market, you end up buying 1,600 units. So you end up buying lower units at a higher price. This translates into a lower than average price of unit acquisition in the long run and benefits the unit holder.
In the long run, SIPs help you gain from the power of compounding, a disciplined investor’s best friend, which has a multiplier effect on wealth.
Systematic Withdrawal Plan (SWP)
A systematic withdrawal plan or SWP is a mechanism whereby you can withdraw a fixed amount from a fund at specific intervals. It’s just like SIP, the only difference being that you withdraw instead of investing. In other words, while the bank debits your money from your account in SIP, it’s credited in SWP.
If you are gazing for a consistent source of income, then SWP could be a prudent option at your
disposal. Like SIP, you can opt for an SWP monthly, quarterly, or semi-annually depending on your
needs. There are two withdrawal options in SWP – fixed and appreciated.
If you are gazing for a consistent source of income, then SWP could be a prudent option at your disposal. Like SIP, you can opt for an SWP monthly, quarterly, or semi-annually depending on your needs. There are two withdrawal options in SWP – fixed and appreciated. In the former, you withdraw a specific amount at a pre-defined interval, whereas in the latter, only you withdraw the appreciated amount.
Unit holders have a choice to go with dividend option or growth option. With dividend option they get periodic dividend. With growth option, there is no dividend but the unit holder can opt to for a SWP. The difference between the two plans is covered in depth in Mutual Funds – Growth option vs Dividend option.
Systematic Transfer Plan (STP)
Systematic Transfer Plan (STP) is the third important ‘S.’ Here; you invest a lump sum in one scheme and transfer a fixed amount from it to a different plan. In most cases, you invest a lump sum in a debt scheme, and a specific amount is transferred at regular intervals to an equity fund. A cautionary note; that both the schemes should be from the same fund house.
Note that while STP, on most occasions, is done from a debt fund to an equity fund, it can also be the opposite. If you are saving for an essential life goal such as a child’s higher education or buying a house, as you approach it, you can start transferring from equities to debt to prevent a dip in the corpus due to market volatility.
To conclude we would like to add:
SIP, SWP, and STP serve specific purposes, and you can use either of them as per your needs. These methods of systematic investments and savings can go a long way in helping you achieve your goals and be on your path to financial freedom. Happy investing!!!