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A Definitive Guide to Systematic Methods: SIP, SWP & STP

In a world that appears random and chaotic, having systems in place can be refreshing. This applies to investments too. The good news is, there are some distinct ‘systematic’ ways to invest your money and help seek reap benefits. 

What is SIP (Systematic Investment Plan)?

A Systematic Investment Plan (SIP) is a disciplined approach to investing where you invest a fixed amount of money in a mutual fund at regular intervals. You can decide the investment amount, frequency and tenure based on your financial goals. 

How SIP works

The fundamental idea of a SIP is simple and straightforward. You regularly invest in a mutual fund regardless of market conditions. The SIP strategy ensures you purchase more fund units when the market is low and lesser units when the market rises. 

Here’s how you are allotted your mutual fund units when you invest through SIP: 

No. of units = (Investment amount/NAV of the fund) 

Imagine you invest Rs. 5,000 in a mutual fund every month. Let’s take two situations when the NAV of the fund is Rs. 20 and Rs. 16. 

Case #1: NAV of the fund is Rs. 20      Case #2: NAV of the fund falls to Rs. 16.

No. of units = 5,000/20 = 250.              No. of units = 5,000/15 = 333 units. 

Either way, you end with a win-win situation. You purchase more units when the market is in a downturn, while the value of your investment increases when the market rises. 

At the time of redemption, all your fund units will have the same value. It is just that you would have purchased some at a lower cost and others at a higher price. In the long-term, your overall cost gets averaged out. This is known as rupee cost averaging. 

When you invest in SIP, ensure a regular investment without hurting your bank balance. It is also important to invest for the long-term and across different market cycles to help maximize your benefits. 

Benefits of Investing in SIP

  • Anybody can invest

SIPs are easy to understand and can be invested by anyone. SIP investments don’t require in-depth analysis or market research. You don’t even need to track the market performance actively. Identify a fund that matches your goals and continue investments. This way, you can avoid market timing and other unsure strategies. 

  • Easy to invest and monitor

You don’t have to spend a lot of time out of your schedule to invest every month. Once you identify a fund you like and complete all the necessary formalities, you can give a standing instruction to your bank account to transfer a fixed sum to the fund each month. You can monitor the fund’s performance directly on your smartphone. The fund house also sends periodic statements to your verified e-mail account. 

  • Power of Compounding

The power of compounding is perhaps the principal benefit of investing through SIP. It ensures your financial yields earn returns themselves. This way, you can hope to achieve a significant corpus through consistent investments. However, this works better if you invest for the long-term. So, start investing early that could  help maximize your investment returns. 

Note – SIP does not any assure a profit or guarantee protection against loss in a declining market. 

What is SWP (Systematic Withdrawal Plan)?

Systematic Withdrawal Plan (Or SWP) is a redemption plan that allows you to withdraw a fixed amount from your fund at regular intervals. You can consider this as a complete opposite of SIP because if SIP is an investment plan, SWP is a withdrawal plan. 

How SWP works

In SIP, you invest small amounts periodically and could end up with a large corpus at a later date. But in SWP, you invest a large corpus initially. After that, you can redeem a certain amount from the fund on a regular basis. 

For example, imagine you invest Rs. 10 lakhs in a debt mutual fund. You give an instruction to withdraw Rs. 10,000 every month. The fund transfers this amount regularly until the value becomes zero. This is a convenient way to earn a regular income. Anybody can opt for SWP; it is regarded as a good option for retired people who want to invest their corpus and also receive a fixed income every month. 

Based on your requirements, you have the option of redeeming a fixed amount, fixed number of units or all returns above a certain base level. 

What is STP (Systematic Transfer Plan)?

A Systematic Transfer Plan (or STP) gives you the option to shift your investments from one mutual fund scheme to another. This is possible for schemes of the same fund house. If you break it down, STP is actually another form of SIP. But instead of transferring money from your bank account to the mutual fund, you transfer from one fund to another regularly. 

How STP works

To initiate an STP, you need to select two funds:

  1. The fund from which the money is transferred
  2. The fund to which the money is to be transferred 

Subsequently, you can choose whether you want the transfers to occur monthly or quarterly etc.. 

Systematic Transfer Plans are generally of three types:

  1. Fixed STP: You can transfer a fixed amount from one fund to another.
  2. Capital Appreciation plan: You can move only the profit of one fund into another.
  3. Flexible plan: You can transfer a variable amount. This includes a fixed amount that is the minimum amount to be transferred, and a variable amount that depends on market volatility. 

STP can be a good investment strategy if you have a large amount to invest in equities but want to do it gradually. So, instead of putting a lump sum in an equity fund, you can invest the amount first in a liquid fund. This can be a safer option as liquid funds come with low risk.

Following this, you can transfer a fixed amount into the equity fund just like a SIP. Here, you can earn potential returns on the liquid fund as well.

Next To Come: Types of Mutual Fund in India