What is SIP?
SIP stands for Systematic Investment Plan. It is an investment strategy commonly used in the context of mutual funds. SIP allows investors to regularly invest a fixed amount of money at predetermined intervals, such as monthly or quarterly, into a mutual fund scheme of their choice.
When an investor opts for SIP, a fixed amount is deducted automatically from their bank account and invested in the chosen mutual fund scheme. The investment is made at regular intervals, regardless of the market conditions. This approach helps in rupee cost averaging, as the investor buys more units when prices are low and fewer units when prices are high.
Let us understand with a help of an example by investing the same amount in FD and SIP.
From the above example, you can see that investing in SIP is more beneficial as there is a fixed monthly amount invested. Also, the returns are expected to be higher than a fixed deposit. In contrast, in a fixed deposit, there is only time lumpsum amount invested where the returns are low but guaranteed. Hence, experts suggest that you must consider investing in a SIP for long term.
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What is STP?
Systematic Transfer Plan (STP) in mutual funds is an automated investment strategy where investors can transfer a fixed or variable amount from one mutual fund scheme to another.
In STP, investors first start with investing a lump sum amount in one mutual fund scheme (source scheme). Then sets a fixed amount transfer from the source scheme to another mutual fund scheme (target scheme). The transfers can be made daily, weekly, monthly or quarterly depending on the investor’s preferences.
Usually, investors use this strategy to transfer money from a debt fund to an equity fund. However, it is important to note that investors must choose schemes within the same mutual fund house. You cannot transfer between different mutual fund houses.
The primary advantage of using STP is the streamlined process of transferring funds. Also, it helps to manage risks while participating in potential returns from mutual fund investments.
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Example: Suppose an investor has a corpus of INR 6 lakhs to invest but the market seems to be volatile and he is not willing to invest all in one investment. So, the investor decides to invest the lumpsum amount (INR 6 lakhs ) in a debt fund and select an STP option to transfer in an equity fund.
By the end of one year, the entire amount will be transferred to an equity fund with no balance in the debt fund. Also, investors earn interest from the debt funds, which is more than the bank account interest rate.
What is SWP?
A systematic Withdrawal Plan (SWP) is a strategy extended to investors that allows them to withdraw a fixed amount from their mutual fund investments regularly. Investors can choose the amount of withdrawal and frequency of withdrawal - it can bi-weekly, monthly or quarterly. Furthermore, they can choose to withdraw only the profits while keeping aside the invested capital or continue with withdrawal as long as balance units are available in the scheme.
Thus, this concept is opposite to SIP, where investors regularly invest from their savings bank account. In SWP, the investments are credited directly to the savings bank account.
SWP is a useful strategy for investors who want to create a regular income stream from their mutual fund investments. Also, it helps to manage cash flows and avoid selling lump sum units at once. However, investors must consider the tax implications and their impact before opting for the SWP facility.
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Example:
Let us assume Mr Ankit already invested in a specific mutual fund with 10,000 units. Now, he plans to opt for a monthly SWP of INR 5000. The NAV at the first withdrawal is INR 20.
Similarly, the number of units after each withdrawal will decline as Mr Ankit will redeem from his investment. If the NAV rises, the number of units withdrawn will be lower. On the other hand, if the NAV falls, the number of units withdrawn will be higher.
Therefore, investors must plan their SWP considering their financial requirements and end goal. Otherwise, it can have a detrimental effect on the fund value due to unplanned withdrawals.
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