Last week, we discussed the difference between Direct and Regular Mutual Funds. Today, we are going to go over the various ways one can invest in and withdraw from mutual funds, namely the SIP, STP and SWP methods.
As with a Fixed Deposit, one can set aside a lump sum amount in mutual funds as well. However, just as banks also have an option to invest at regular intervals via a Recurring Deposit, mutual funds have this kind of a facility, too – the SIP.
Systematic Investment Plan
SIP is a way to invest in mutual funds at regular intervals. The intervals are usually monthly, but it may also be daily, weekly or quarterly. As an investor, you would need to mention the duration, amount of installment and date on which this amount would automatically be debited from your account. This is a great way to invest, especially in equity mutual funds, because it averages out the cost.
Another reason SIPs are an intelligent way to invest is because they instil the habit of investing on a regular basis. Investing is less about making marginal gains, and more about discipline and consistency. This makes the SIP method a perfect solution for long-term wealth creation. Moreover, you can invest as low as ₹500 per month via an SIP!
Bear in mind that if one fails to maintain the required balance in their bank account, the SIP will stay active for upto three months. Post that, it will be deactivated, and one would have to restart the SIP. Some banks may even penalise you for dishonoring the auto-debit payments.
Systematic Transfer Plan
An STP is similar to an SIP, in the sense that it promotes regular investing. However, an STP, as the name suggests, is when we transfer from one scheme to another. Let’s say we have invested in a debt mutual fund, and now want to invest in an equity mutual fund, we can use the STP method to do so.
Oftentimes, one opts for a systematic transfer plan when there is a lump sum amount that they wish to invest in equity funds. Since it is not wise to invest a large chunk of money in equity in one shot, one can stagger the investment with an STP. This would require you to first put the lump sum in a debt fund, and then transfer smaller amounts to the equity fund at regular intervals.
It is pertinent to note that STPs only work if the schemes are of the same fund house.
Systematic Withdrawal Plan
SWP is a way to withdraw in a systematic manner. It is beneficial for retirees who want to receive a fixed amount every month. One can also use an SWP to withdraw an amount from an equity mutual fund over time. This helps you get the average rate while selling the units over say 4-6 months, instead of all at once.
Mutual funds, by virtue of being well-diversified and managed by professionals, are a great way to build wealth. With efficient methods such as the SIP, STP and SWP, mutual funds provide further benefits for us investors. The habit of setting aside a portion of your income every month, automating your investments, and balancing your portfolio between the asset classes of debt and equity wisely, will ensure your finances are in good health.
