To invest in mutual funds there are two modes of transactions available – Lumpsum or periodic automated transactions called systematic plans. Transactions of Purchases, Switches, and Redemptions can be done through Systematic Investments Plans (SIP), Systematic Transfer Plan(STP), and Systematic Withdrawal plan (SWP) respectively. These systematic plans transact schemes in a fixed and periodic manner.
One need to invest a fixed sum of money in identified mutual funds and plan - daily, weekly, monthly, or, quarterly investment timings according to individual suitability. Bigger goals can be achieved through smaller tranches of investments done periodically and with the power of compounding.
– The longer the period of investment, the snowball effect compound returns. Even a ten-year head start can have a major impact on your returns.
- You can start investing in mutual funds through SIP with as low as INR 100 per month. SIP is an affordable way of investing each month without hurting your pocket.
- Rupee cost averaging is a concept where you purchase more units when the Net Asset Value (NAV) of the fund is low and lesser units while the NAV is high. Through SIP, you can average your purchasing cost over the tenure of the investment period. You will not need to worry about timing the market when you invest through a SIP.
- SIP is a convenient mode of investing. Like most investors, you might not have the time for extensive market research and analysis for adjusting or balancing your portfolio. Hence, once you pick a good fund, you can give standing instructions to the bank and allow SIP to take care of your monthly investments.
Almost every investor is aware of Systematic Investment Plans (SIPs). But what about Systematic Transfer Plans or STPs? STP means transferring money from one mutual fund plan to another. STP is a smart strategy to stagger your investment over a specific term to reduce risks and balance returns.
For instance, if you invest ‘systematically’ in equities, you can earn risk-free returns even when the markets are volatile. Here, an AMC permits you to invest a lump sum in one fund, and transfer a fixed amount to another scheme regularly. The former fund is called source scheme or transferor scheme, and the latter is referred to as the target scheme or destination scheme.
Here, the amount and frequency of transfer are fixed. Investors can decide on this amount as per their financial goal and apply for the same.
For this kind of STP, only the capital appreciated is transferred from source fund to the destination fund, and the capital part remains safe.
As the name suggests, Flexi STP is flexible. This means you can choose to transfer a varied amount from the source fund to the target fund. Investors generally want the amount as per the market rate fluctuations. For instance, if the Net Asset Value of the destination fund dips, then you can increase the amount and vice versa.
A Systematic Withdrawal Plan or SWP allows an investor to withdraw from his/her mutual fund scheme every month on predefined dates. This withdrawal could be a fixed or a variable amount. It could be made on an annual, semi-annual, quarterly, or even monthly basis.
It allows one to redeem his or her investment from a mutual fund scheme in a phased manner/ installments. SWP allows you to customise the cash flow as per your requirement. One can choose to either withdraw just the capital gain on investments or a fixed amount, in this way, one will not only have his money still invested in the scheme but also be able to access regular income and returns. If one's goal requires being funded, he or she may opt for SWP. An SWP also helps investor a second source of income in addiiton to his salary or period incomes to fund your travel or other needs.