Investing in mutual funds is much easier and handy than investing in stocks or real estate. With the high returns and growth, they have come up off-late, nobody is spared from the charm of mutual funds. In order to invest smoothly in mutual funds and stay market-updated, a few jargons need to be understood as an investor. The systematic method of mutual funds is an approach that most (almost all) of the fund houses, fund managers, investors, traders etc. use in day-to-day investing.
Here is a break down of the most commonly used terms in mutual funds- SIP, SWP, and STP.
SIP, SWP, and STP are the three terms which come with systematic investment, withdrawal, and transfer plan.
SIP – SYSTEMATIC INVESTMENT PLAN
SIP is a systematic investment plan which allows the investor to invest a fixed amount at fixed intervals which are pre-determined in a systematic manner. These investments with SIP can be done on a yearly, half-yearly, quarterly, monthly or weekly basis. The biggest advantage of investing with SIP is that it manages your funds and investments allowing you to focus on other important things and tasks.
While you invest with SIP over a long-term, the benefits are reaped at the time of returns as long-term systematic investment balances out the risk factor.
Following are the benefits of SIP over one-time lump sum investment:
1. Disciplined investment approach
2. Allows you to start small and increase the investment amount gradually
3. Comes with two beneficial investment strategies-
– Power of compounding- the returns are compounded making the amount huge
– Rupee cost averaging- balances out the risk and volatility
4. Easy to use
5. Timing the market is not required
STP – SYSTEMATIC TRANSFER PLAN
STP is a systematic transfer plan which allows the fund manager or fund house to switch or transfer from one fund to another with the consent of the investor. Since mutual funds are market products which bring along volatility associated with the market itself, it becomes very important to keep pace with the market and make necessary changes in order to avoid any downfalls. STP can be considered as a safeguard or firewall against market volatility. For instance, if the fund manager assesses that there is some risk in the debt fund in which he has invested on the investor’s behalf, he can transfer the plan from debt funds to equity funds hence balancing out the risk associated. Once the market normalizes, the same funds can be transferred back to debt funds. Bigger the investment, larger the STP duration.
Following are the benefits of STP
1. Consistent returns
2. Cost averaging
3. Portfolio Re-balancing
TYPES OF STP
There are three of STP
1. Fixed STP– A fixed amount is drawn from investment and invested in another.
2. Capital appreciation STP– The profit gained from one investment is drawn out and invested in other.
3. Flexi STP– A flexi-STP allows you to keep one set of funds in one investment type say debt funds and transfer it to other type say equity funds depending upon the market condition.
SWP SYSTEMATIC WITHDRAWAL PLAN
SWP is a systematic withdrawal plan which allows the investor to redeem or withdraw a designated amount of money at regular intervals. The withdrawn money can be used as a regular source of income or can be invested back in a different scheme. SWP is an effective plan for those who have retired or need multiple income sources. They also protect from market volatility.
Following are the benefits of SWP
1. Regular income
It helps in building a regular flow of income from the investment made on a monthly or quarterly basis.
2. Tax benefits
Rather than selling everything at once, creating intervals on withdrawal comes with tax benefits.
3. Protection from market volatility
Regular withdrawal from the investment averages out the market volatility.
TYPES OF SWP
There are two types of SWP
1. Fixed withdrawal– In the fixed withdrawal option, the investor withdraws a specified amount of money on a monthly or quarterly basis
2. Appreciation withdrawal– In the appreciation withdrawal option, the investor withdraws only the appreciation gained or the returns gained on a monthly or quarterly basis.