Read any investment advice in mutual funds and a casual SIP, SWP or an STP pops up. These are tools for investing in mutual funds that help you phase-out your purchases and earn better return. Here’s how you can use them.
FRESH AND REGULAR
SIP expands into Systematic Investment Plan. It is rather like a recurring deposit – a certain amount is debited at regular intervals from your bank account and used to buy units in a fund. An SIP can be either monthly or quarterly. The amount to be invested each month (or quarter), and how long you continue the plan is up to you.
So when does an SIP make sense? First, if you’re irregular in your savings – an SIP makes sure that you compulsorily save some money every month.
Second, if you don’t have the time to devote to studying the market, or if you are hazy on nuances of market behaviour, you don’t have to worry about that pesky timing-the-market problem. When run over a long period of time of 24 months or more, an SIP will help mitigate the effects of market volatility, since investments are being made at market highs and lows.
Third, if you do not have lump sums to invest, an SIP helps since minimum amounts to start one can be as less as Rs 500. But SIPs aren’t a good idea in theme funds. These require careful monitoring and timing since sectors can fall in and out of favour.
INTO YOUR ACCOUNT
Just as you shouldn’t jump into equity funds all at once, you shouldn’t exit from them either. For, withdrawing all your money from a fund at the wrong time can expose your return to poor timing too.
That’s where the SWP or a Systematic Withdrawal Plan comes in. You withdraw a sum from your fund periodically and the proceeds flow into your account.
You have two options – one is to withdraw a fixed sum, and the other is to take out only the gains you have made.
Such withdrawing can be monthly, quarterly or half-yearly. You cannot usually run an SWP along with an SIP in the same fund. Exit loads, if applicable (typically for investments of less than a year), will be enforced. Short-term capital gains, if you have held the investments for less than a year, also apply.
An SWP makes sense whenever you would like to withdraw your money from a fund.
It also helps when you have already invested a good amount, and you wish to derive a regular ‘income’ from it. SWPs may be a good way to withdraw your money when you are nearing retirement, and will not have a regular monthly income. An SWP can help you have a steady cash flow from your fund, in place of the dividend option.
FROM ONE TO THE OTHER
What if you do get a windfall from your employer (or a lottery!) and want to invest it in funds? Then you should do an STP. An STP or Systematic Transfer Plan involves parking your money in one fund (usually a safe option like a liquid or debt fund) and then investing a specific sum at regular intervals in another scheme, usually an equity fund.
A STP may also be used to switch a fixed sum, or the capital gains you made to another fund. Usually gains on an equity fund can be transferred to a debt fund to ‘protect’ the gains.
A third option offered by some fund houses is variable amounts linked to the value of the investment of the target fund. Note again that exit loads, if applicable, will be levied. Frequency of switches ranges from daily activity to weekly, monthly and quarterly.
An STP is a useful tool when you’re sitting on a pile of money.
Putting that in a debt fund offers relatively stable returns on your idle cash. The regular transfers into an equity fund will help pull in benefits of an SIP.
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