Systematic investment plan (SIP), Systematic transfer plan (STP) and Systematic withdrawal plan (SWP) are the three frequently used in the context of mutual funds. In this post we will I will discuss what they mean and how you can benefit from these plans.
Under this method, you invest small amounts of money regularly. This small amount invested regularly over time helps you build a large corpus. By spreading out investments over a period of time, you average your purchase cost. This prevents you from committing all your money at a market peak.
SIPs also bring discipline to investing and make investing a habit. The frequency of SIPs can vary; you can do a monthly, weekly or daily SIP. Most common is to invest monthly on a particular date. So a fixed amount is debited form your bank account towards mutual fund of your choice on a particular date. SIPs have limited use in debt schemes as they are not as volatile or risky as equity schemes.
Benefit of SIP is that it helps you to have dedicated and focused approach. It brings discipline and is convenient. Another big advantage is rupee cost averaging. Because you get more units when market is down and lesser units when market is up, it helps to overcome risk of volatility and helps you generating better returns in long term.
An STP can be done from an equity fund to a debt fund as well and may be helpful if you are saving for some important goal, like your child's education, buying a home or retirement and you are nearing your goal, don't wait till the target date. Begin moving your money from equity to debt well before the time when you need the money.
Benefit of STP is that it helps you get extra return on the lumpsum while it is being transferred to equity. Typically, the larger the amount, the longer the time period. In general, you transfer from a liquid or ultra short term fund to equity fund.
Under this method of withdrawal, you withdraw a designated sum of money from a fund at regular intervals (Monthly or Quarterly mostly). Such a system is particularly suited to retirees, who are looking for a fixed flow of income.
Money is transferred from fund house to your bank account. It's reverse of SIP where money is transferred from your bank account to fund house.
Benefit of SWP is that it provides the investor a certain level of protection from market instability and help avoid timing the market.
Related Links -
- Mutual Fund cut-off time
- Advantages of Mutual Funds
- Limitations and Disadvantages of Mutual Funds
- Classification of Debt Funds
Systematic investment plan (SIP)
Firstly, i want to clear that SIP is not a mutual fund or any scheme to invest, it's a method of investment.
Under this method, you invest small amounts of money regularly. This small amount invested regularly over time helps you build a large corpus. By spreading out investments over a period of time, you average your purchase cost. This prevents you from committing all your money at a market peak.
SIPs also bring discipline to investing and make investing a habit. The frequency of SIPs can vary; you can do a monthly, weekly or daily SIP. Most common is to invest monthly on a particular date. So a fixed amount is debited form your bank account towards mutual fund of your choice on a particular date. SIPs have limited use in debt schemes as they are not as volatile or risky as equity schemes.
Benefit of SIP is that it helps you to have dedicated and focused approach. It brings discipline and is convenient. Another big advantage is rupee cost averaging. Because you get more units when market is down and lesser units when market is up, it helps to overcome risk of volatility and helps you generating better returns in long term.
Systematic transfer plan (STP)
Under this method of investment, amount is transferred from one mutual fund to another mutual fund of same fund house.
Generally, one invests lumpsum amount and then transfer a particular amount to some other scheme in a predetermined interval. In a volatile market, STP helps spread investments over a period of time to average the purchase cost and rule out the risk of getting into the market at its peak. With an STP, an investor can invest a lump sum in one scheme (mostly a debt scheme) and transfer a fixed amount regularly to another scheme (mostly an equity scheme).
An STP can be done from an equity fund to a debt fund as well and may be helpful if you are saving for some important goal, like your child's education, buying a home or retirement and you are nearing your goal, don't wait till the target date. Begin moving your money from equity to debt well before the time when you need the money.
Benefit of STP is that it helps you get extra return on the lumpsum while it is being transferred to equity. Typically, the larger the amount, the longer the time period. In general, you transfer from a liquid or ultra short term fund to equity fund.
Systematic withdrawal plan (SWP)
Money is transferred from fund house to your bank account. It's reverse of SIP where money is transferred from your bank account to fund house.
Benefit of SWP is that it provides the investor a certain level of protection from market instability and help avoid timing the market.
Related Links -
- Mutual Fund cut-off time
- Advantages of Mutual Funds
- Limitations and Disadvantages of Mutual Funds
- Classification of Debt Funds
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