Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP) is an effective investment tool offered by mutual fund houses to investors wherein they can periodically invest small sums of money instead of a large lump sum. The investment can be made on a weekly, monthly or quarterly basis as per the investor’s convenience for a particular period of time.

How SIP works?

The success of SIP depends on how much time you spend in the market and not how you time the market. In an SIP, a predetermined sum of money is debited at regular intervals (weekly/monthly/quarterly) from the investor’s account either via ECS or through post dated cheques and invested in a specified mutual fund. The investor is allocated a certain number of units of the fund based on the prevailing Net Asset Value (NAV) on the specified date. Thus every time funds get debited from the bank account additional units get added to the investor’s mutual fund account. The investor enjoys the advantage of Rupee Cost Averaging as he will be allotted more units when the NAV declines and fewer units when the NAV increases. The investor will also enjoy the benefit of compounding as when you stay invested over a long period of time it enables your money to earn money over time.

Why adopt the SIP Route?

It is virtually impossible for a retail investor to accurately predict market movements and successfully time the market over a long period of time. There is a high risk he may invest when the market has peaked and thus may lose his life savings in the bargain. In addition many investors do not have the time or inclination to track market movements on a regular basis. In such a scenario, SIP is the most efficient tool in the hands of an investor to tackle the unpredictability of the stock market. There are a variety of mutual funds (equity, debt, balanced and ELSS) to cater to numerous requirements. Thus depending on his goal, time horizon and quantum of funds available, an investor can select an appropriate fund. The investor can research and take his own decision or seek the help of a financial expert who will guide him.

Systematic Transfer Plan (STP)

STP is a variant of SIP. STP enables an investor to transfer his investment from one asset type to another gradually over a period. In an STP, the investor invests a lumpsum amount in one scheme and regularly transfers a fixed or variable amount into another scheme. Transfers are usually made from debt funds to equity funds if the market is doing well and vice versa if the market is not performing well. The STP can be classified based on the amount transferred from the source scheme to the target scheme. If a fixed sum is transferred from the source to the target scheme, then it is known as Fixed STP, and if the sum transferred is the profit part of the investment of source scheme, then it is known as Capital Appreciation STP. STP like SIP requires discipline on the part of the investor. Hastily discontinuing an STP because of a sudden change in interest rates is not advisable as it will not benefit the investor in the long run.

Systematic Withdrawal Plan (SWP)

In an SWP, an investor is permitted to withdraw a fixed or variable amount from his mutual fund scheme on a prefixed date on a monthly, quarterly, semi-annually or annually basis depending on his requirements. SWP provides regular income to the investor.

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"Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. Past performance is not an indicator of future returns."