Investing is meant to be easy. And systematic plans such as Systematic Investment Plans(SIP), systematic transfer plans (STP) and systematic withdrawals plans (SWP) make it very easy for investors to plan and manage their finances.
These three routes are used to effectively manage your mutual fund investments in the long run. Let’s look at each one of them in detail.
Of late, systematic investment plan has been on everyone’s lips. The essence of SIP is similar to a recurring account. Just like you would set up an RD where a certain sum of money would be debited from your savings account to the recurring account, with SIP too, a certain amount of money will be auto-debited from your savings account to the mutual fund of your choice.
Many investors feel that SIPs are different from mutual funds. But it is not true. SIP is just a route to invest in mutual funds. Investing a lump sum is another way to invest in mutual funds.
SIP is an easy way to invest in mutual funds for salaried individuals. One of the main benefits of SIP is the benefit of rupee cost averaging. Through rupee cost averaging, investors are allotted towards more units when the market is down and fewer units when markets are soaring. Thus, SIP brings the best of both worlds.
Read: 5 Common SIP Myths
Systematic Transfer Plan (STP) is similar to SIP and works on the same principle. While in the case of SIP, the amount is transferred from savings account to the mutual fund, in STP, the amount is transferred from one fund to another.
This facility is useful when you land up with a large corpus and don’t want to make a lumpsum investment. In this scenario, you can park the amount in a low-risk fund like a liquid fund. You can set up an STP thorough which a fixed amount of money will be transferred to an equity fund regularly, say monthly.
Along with the benefit of rupee cost of averaging, the amount in the liquid fund will continue to grow and give returns as well.
Let us take an example. Assume that a fixed deposit of Rs.5 lakh has matured. You are looking for a better investment option. Equity mutual funds seem a better investment option but you don’t want to invest the entire proportion in an equity mutual fund. In this case, park your money in a liquid fund and then set up a systematic transfer fund of Rs. 5,000 to the equity fund. So, every month Rs. 5,000 will be transferred from the liquid fund to the equity fund.
SIP and STP were the two systematic ways to invest. Systematic Withdrawal Plan (SWP) is a systematic way to withdraw the investments or the corpus that you have built throughout the years. In simple terms, SWP is the opposite of SIP. While SIP lets you invest a certain amount on a regular period, through SWP, you can withdraw a sum of money every month.
SWP helps you to plan for your retirement. It is useful for investors who require an income stream. Just like the STP, it is better to set up the SWP from a low volatile fund such as a liquid fund or low duration fund. This will help to make sure that the capital and the principal amount is protected from wide market fluctuations.
These were the three ways of systematic investment and withdrawal that can help you to plan your finances easily.Tags: SIp, stp, swp
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