What is SIP, STP and SWP in Mutual Funds?
Mutual Funds are flexible and transparent investment options for you to invest as per your risk profile. You can invest in equities, debt, gold etc in the ratio of your choice through Mutual Fund route. These are tax-friendly options too compared to other investments. Here, your savings will be managed by Fund Management experts.
As you know, the investment in equities will give better returns, only if invested for long term. Equities require 7-10 years to give any meaningful returns. If you are investing for short-term goals, it can be done ideally through Debt Mutual Funds or through Balanced Mutual Funds.
Mutual Funds offer flexibility to invest and withdraw your investments in the most tax efficient way. Let us see the flexibility options offered by Mutual Funds.
Systematic Investment Plan (SIP) in Mutual Funds
SIP is the most common term used by all investment advisors. This is the simple way of investing in Mutual Funds. It is like a bank recurring deposit, where you commit to invest a fixed amount every month on a particular date for a particular period. You fix the amount according to your financial goals and invest it regularly. You can issue post dated cheques or can opt for ECS facility. SIPs offer the benefit of Rupee Cost Averaging and bring in discipline in investing. Your investment will buy more units when the markets are lower and will buy fewer units, when the markets are higher. This will average out your cost and you will benefit when the market rises in the long term. This type of investment is ideal and simple because you need not worry about the levels of the market.
If you start investing Rs. 5,000 per month from your age 30, you can accumulate around Rs. 1.5 Crore on your retirement at age 60, if the CAGR is 12%. Please note that your investment in these 30 years will be only Rs. 18 Lakhs. Rs. 1.32 Crore is the extra accumulation in 30 years. This is the power of compounding!
You have the flexibility to increase/decrease/stop the SIPs as per your convenience. If a Fund is not performing, you can stop your SIP in that and start a SIP in a better Fund. You can withdraw from the accumulation in case of any emergency. The withdrawal is tax-free, if you withdraw after 1 year in case of Equity Fund.
Systematic Transfer Plan (STP) in Mutual Funds
STP can be useful, when you have a lump sum to invest in a Mutual Fund. Instead of investing the entire amount into Equity Fund in one go, you can invest that amount in any Debt Fund of the same Fund House and opt for a Systematic Transfer to the Equity Fund.
Suppose, you want to invest Rs. 1 Lakh in an Equity Fund, you can invest the Rs. 1 Lakh in a Debt Fund and opt for a STP of Rs. 10,000 into the Equity Fund of your choice. At a fixed date of every month, Rs. 10,000 from the Debt Fund will be transferred to the selected Equity Fund. The entire amount will be transferred to the Equity Fund, in 10 months. This will ensure that your money is unaffected by any market volatility in the short term. Your investment will be getting debt returns, as long as it is in the Debt Fund. At the end of 10 months, there will be some left out amount in the Debt Fund, which is the growth of the Debt Funds in that 10 months. You can transfer this accumulated amount in the Debt Fund also into the Equity Fund. Instead of monthly STP, you can opt for weekly STP. You can decide any term as per your choice. It is flexible.
STP is an ideal tool to insulate your savings when you are nearing the financial goals. If you have accumulated Rs. 10 Lakhs in your Equity Fund, and you require the amount after 2 years for your son’s education, it is better to start a STP from the Equity Fund to a Debt Fund to protect your savings from any last minute market swing. This will ensure a safe landing.
Systematic Withdrawal Plan (SWP) in Mutual Funds
If you want a pension after retirement, SWP will be the ideal way for it from Mutual Fund route.
This allows you to withdraw your accumulation at a fixed date of your choice. Here, you can request for withdrawal of a prefixed amount at fixed intervals. The amount withdrawn is treated as redemption of units at the applicable NAV. You can opt for cheque payment or direct credit to your bank account. After retirement, you can set up a SWP from your accumulation, which will act as a regular pension.
Mutual Funds are ideal investment vehicle for you for all seasons
Mutual Funds give you the flexible investment options through SIP. You can invest during your active life for your long-term goals through Equity Mutual Funds. Mutual Funds offer tax efficient way of investing for long-term goals. The investments in Equity Mutual Funds are tax-free after 1 year of investment. Debt Funds are eligible for indexation benefits, while calculating tax. This will practically take them, out of the tax net in periods of high inflation like this.
You can start saving through SIPs when you are earning. The earlier you start, the better. When you are nearing the goals, you can do a STP to Debt Fund to reduce the impact of market volatility. After retirement, you can ensure regular income using SWP.