Mutual Funds are now popular with retail investors and SIP is already a household name. While SIP has gained in popularity, Mutual Fund investors usually have two separate investing requirements. Some have a corpus to invest and others need to invest smaller amounts from their salary or monthly income regularly and create wealth.
Whether you have a corpus to invest or regular amounts from your salary, you may choose to time your investment or simply stagger your investments over a period. The latter done systematically at fixed intervals is fast becoming popular with retail Mutual Fund investors. In this article, lets briefly discuss three such Systematic Investing techniques and appreciate their increasing popularity.
Systematic Investment Plan – SIP:
Systematic Investment Plan or SIP as it is popularly known is an investment route offered by Mutual Funds, where one can invest a fixed amount in a Mutual Fund scheme at regular intervals, usually monthly. Salaried individuals and individuals with regular monthly income use the SIP route to invest in mutual fund schemes, regularly to achieve specific financial goals or simply to create wealth.
SIP is easy to start and can be started with amounts as low as Rs500 per month. Investors can invest any amount in their favourite schemes(s) much like the recurring deposits and continue to invest till their goals are met or they wish. One can also withdraw the entire or partial accumulation from the schemes anytime, hence they are usually considered very liquid. While monthly is the most common frequency availed other frequencies like weekly, fortnightly, quarterly and sometimes daily are also available.
One of the major advantages of Systematic Investment Plans is that they aid in Disciplined Investing. The SIP amounts are auto debited from the investors bank accounts and systematically and perpetually invested in the schemes which soon become a habit and the investor is on auto pilot mode to create wealth. Disciplined Investing, sometimes overlooked is one of the basic tenets of wealth creation.
Equity Markets trends in the long term are on the up but the path is always volatile. While some investors prefer timing the market and investing on dips, SIP investors avoid any such human interventions. Instead, they invest at highs, lows, and all price points and in the process gather more units of a scheme when prices are low and vice versa. The Rupee-Cost Averaging effect averages out the cost of units and lessens the effect of short-term market fluctuations in the schemes.
Check out SIP performances of existing funds here
Systematic Transfer Plan: STP
Some investors have a corpus to invest and few others who have irregular income and prefer investing in lumpsums as against fixed monthly amounts by the salaried investors. While some attempt identifying the right valuations, others prefer the systematic route to invest. Systematic Transfer Plan or STP is a process where investors park their corpus in a Debt Fund (usually Liquid or UST) and regularly transfer part amount in their target fund at fixed frequencies over a brief period. This allows investors to overcome immediate volatility in their schemes and benefit from the Rupee Cost Averaging.
Experts and independent studies corroborate that in most market conditions particularly volatile market conditions, the STP route fetches a favourable price as compared to Lumpsum investing.
Mutual Funds allow frequencies ranging from daily to weekly to monthly and quarterly too. Investors who do not wish to time the market and fear an immediate volatility risk prefer the Systematic route here.
Check out past STP opportunities of existing funds here
Systematic Withdrawal Plan – SWP:
Systematic Withdrawal Plan or SWP in a way is the reverse of an SIP. SWP is a process where investors can withdraw fixed amounts from a scheme, systematically and perpetually in a way that it becomes a regular income. Infact SWP is used primarily by retired people, senior citizens and individuals who depend on regular income. SWP is not a replacement to an existing Monthly Income Scheme or its equivalents but it does complement them.
In SWP, a fixed amount at a fixed interval is withdrawn from a mutual fund scheme regularly and perpetually so as to create a regular income. The source schemes are usually Equity Hybrid Funds or Balanced Advantage Funds. These fixed amounts withdrawn are calculated at a rate which is slightly lower than the expected rate of return the source scheme generates. For Example, if the source scheme is expected to generate a return of 9% cagr per annum, then the withdrawable amount is usually set at 7% to 8% cagr per annum. This allows the investor to withdraw only the scheme appreciation keeping the Capital intact which over time appreciates a bit. However, this is true in the medium to long term. In the short term, market volatility might affect the scheme returns and, in such cases, regular withdrawals might deplete Capital though this is more than compensated in the medium to long term.
With dividends taxable in hands of investors and Equity Hybrid funds offering equity taxation, SWPs are a tax efficient option to generate decent returns. Though scheme returns are not guaranteed, SWP has the inherent potential to provide for higher withdrawals with time which then comes handy in tackling inflation.
Check out SWP opportunities from existing funds
The Systematic Investing process allows investors to handle market volatility better and infact profit from it. Experts believe Returns are mostly a byproduct of discipline and the entire Systematic Process ensures adherence to discipline than tactical posturing.