In the world of investing, knowledge truly is power. While Systematic Investment Plans (SIPs) have become a staple for many mutual fund investors, there are nuances and lesser-known features that often escape our attention. The same can be said for their cousins, Systematic Withdrawal Plans (SWPs), and Systematic Transfer Plans (STPs). Let's delve into some of the lesser-known aspects of SIPs, SWPs, and STPs for a more informed investment journey.
SIP – Systematic Investment Plan
Convenience at its Best: SIPs offer a hassle-free way to make regular investments in a mutual fund scheme. By selecting a specific date each month, determining the investment duration, and fixing the amount to be debited from your bank account, you set the wheels in motion for consistent investing.
Lock-in Periods: When you invest through SIPs, you're purchasing units of the scheme at the current Net Asset Value (NAV). For instance, if you're SIP-ing into an Equity Linked Savings Scheme (ELSS), the units you buy in each SIP transaction are typically locked for 3 years. This means that in a 12-month SIP in an ELSS, you can redeem all purchased units only after 4 years from the SIP start date.
The Power of Top-ups: One often-overlooked gem of SIP investing is the ability to top-up your investments. This means increasing your installment amount after every 12 months. It's a powerful tool that lets you reach your financial goals with less strain on your initial budget.
SWP – Systematic Withdrawal Plan
Structured Withdrawals: SWPs offer a structured approach to making withdrawals or redemptions from a mutual fund scheme. You choose a specific date each month, decide on the withdrawal duration, and set the fixed amount to be credited to your bank account from the chosen scheme. This continues until your fund depletes or the specified tenure ends, whichever comes first.
Adjustable Withdrawals: Similar to step-up SIPs, adjusting or inflating your withdrawals through SWPs requires some tweaking. However, it's a logical step to ensure that your withdrawal amount isn't fixed. Gradually increasing withdrawals, perhaps annually, can support rising household expenses and lifestyle needs.
Tax Benefits: Here's a lesser-known fact – only the capital gains part of your SWP withdrawal is taxed, not the entire amount. When you redeem units through SWP, your capital gain is calculated as: Number of Units Redeemed * (Sale NAV – Purchase NAV). This tax efficiency can be a significant advantage for investors.
STP – Systematic Transfer Plan
Investing with Confidence: STPs are ideal for investors who prefer not to invest a large lump sum into an equity scheme all at once. Instead, they opt to systematically invest over a period, earning higher interest than a savings account on the uninvested amount. Flexibility is key here, allowing you to adjust your investment strategy as market conditions change.
The Two-Step Process: To make STPs work, you first invest your money into a liquid scheme of the same mutual fund house as your chosen equity scheme. Then, based on your instructions, a fixed amount is transferred from the liquid fund to the equity scheme at regular intervals, such as monthly or as per your chosen frequency.
Capitalizing on Market Movements: STPs shine when markets are on a downward trend. By consistently investing the same amount, you end up buying more units when prices are low. This strategy can be advantageous if you're bearish on the market in the short term or anticipate significant volatility.
Understanding these facts about SIPs, SWPs, and STPs can empower you to make more informed investment decisions. Whether you're aiming for long-term wealth creation or managing cash flows in retirement, these tools offer valuable strategies to navigate the world of mutual fund investing. So, dive in by clicking on the below tab, explore, and let your investments work smarter for you.