While talking about stock market investments, mutual funds (MF) occupy a large pie of the investors’ mind. Many enthusiastic investors confuse the systematic investment plans (SIP) as some stand-alone product instead of it being one of the modes of investment.
Systematic Investment Plans best suited for salaried individuals
A SIP thus is a periodic investment into a MF routed from one’s bank account, the periodicity of which would vary from daily to weekly to monthly or whichever time period the asset management company (AMC) offers.
The advent of SIP is due to the convenience it provides while assisting one to execute one of the important rules of investing i.e. rupee cost averaging. SIP achieves the purchase of an asset at a later date with capital later earned. So, it best suits for the investors who would want to bring in discipline, consistency and periodicity to their investment behavior while addressing some of the investing principles.
This hence best fits investors with salaried income which ensures a constant amount being diverted into equity investment at a pre-specified date. Of course, AMCs has also achieved a bit of innovation by introducing SIP top-ups. It’s an additional defined amount that goes into a regular SIP, by prior instructions issued to the bank.
The other lesser known cousin of systematic investment is Systematic Transfer Plan (STP) which could be used to one’s advantage. Unlike the SIP which suits the future cashflows, STP is about managing current inflows to tackle volatility and participate in the equity markets.
For a STP to happen, the investor has to first move the fund from the bank account to a liquid fund or any other suitable short-term fund. Through STP, an investor could transfer from the liquid fund to an equity fund with a fixed periodicity of daily, weekly, fortnightly or quarterly.
STP also achieves the rupee cost averaging while dodging volatility of the market. The beauty of this strategy is that while the fund flows to equity in a phased manner, the residual fund at the origin doesn’t depreciate as minimum return is achieved through the liquid fund.
STP could also be used to move fund from equity to liquid. For instance, when one plans for a goal through equity investment and as the goal is approached, one could move funds from the riskier avenues of equity to a more stable avenues like the liquid funds. This helps one to prepare for the goal without compromising the safety of the funds and the returns earned over them.
When an investor needs cash in a regular frequency and also if the fund requires a constant amount then a Systematic Withdrawal Plan is highly recommended. By employing SWP, an investor could redeem or withdraw a designated amount in regular intervals (mostly monthly).
This suits best for investors looking for fixed and regular income. Functionally this is an inverse of SIP where the fund here is withdrawn from the MF to feed the savings account. Despite the introduction of the long-term capital gains taxation in equity and related investments, the utility of this strategy still remains intact.
This could form as a one of the income streams for investors who have or are retired. Of course, one should be wary of the taxation and other exit loads that could add up as cost to the investor. By utilising these systematic strategies, investors could gain better of their investments. (The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at firstname.lastname@example.org)