Flexible Investment Options (SIP/ STP/ SWP/ LUMPSUMP)

Flexible Investment Options (SIP/ STP/ SWP/ LUMPSUMP)

Mutual funds offer various types of investment options such as SIP, STP, SWP, and Lumpsum. Investors can decide the type of investment options based on their requirement, time horizon and risk profiles.

SIP stands for systematic investment plan. It is a smart way to invest in mutual funds by investing a small amount at fixed frequency over a period of time. It is often called an ideal option for any investor as it helps him/her to achieve his/her financial goal. An individual can start investing in an SIP with as low as Rs 500. And he/she can choose the pre-defined frequency as weekly/ monthly/ quarterly/ semi-annually or annually.

  • An SIP gives you the flexibility to choose the investment amount as well as the number of months you want to invest, the frequency of investment, and the date on which you would like to invest. You can stop your SIP anytime you feel like.
  • An investor can achieve rupee cost averaging on his/her investments in mutual funds through SIP. In case of market fluctuations, SIPs average out the cost of investing by buying more units when the NAV of the fund is low and vice versa.

Illustration

SIP Date (a) SIP Amount (B) NAV © Units (d) Avg Cost (b/d)
  • 01-02-2019
  • 1000
  • 14
  • 71.43
  • 13.00
  • 01-03-2019
  • 1000
  • 13
  • 76.92
  • 01-04-2019
  • 1000
  • 12
  • 83.33
  • 3000
  • 231.68

The above illustration indicates that when the NAV was 12, it got the more units and fewer units when the NAV was 14. This is how SIPs help investors to average out the cost of investment.

  • SIP & The Power Of Compounding
  • Compounding is a powerful process in investing because it allows investors to make money not just on the money invested but also on the money earned through investing.

    The primary benefit of compounding is that an investor can earn returns not only on the principal amount but also gain on the returns on the principal amount, that is, earn interest on interest too. The longer the money stays invested, the more it can multiply and accrue returns from the scheme through compounding in such a way that more opportunity is gained through higher rates.

Illustration

Monthly SIP 10000

SIP Period Total Investment Returns
    5% 10% 12% 15%
3 360,000 389,148 421,300 435,076 896,817
5 600,000 682,894 780,824 824,864 896,817
7 840,000 1,007,467 1,219,583 1,319,790 1,489,682
10 1,200,000 1,559,293 2,065,520 2,323,391 2,786,573

The above illustration indicates that a monthly investment of Rs 10,000 for different time periods with an assumption of different returns is possible through compounding. Hence, the magic of compounding enables investors to meet his/her financial needs and goals.

The variation in SIP such as Flexi SIP and Step-up SIP offers investors more ways to invest.

Flexi SIP: Investors can change the investment amount according to market conditions in flexi SIP. To elaborate, a lower amount can be invested when the markets are high and vice versa.

Step-up SIP: Step-up SIP, often called as top-up SIP, enables investors to increase their investment amount in SIP over a specific period of time. This is to say that the investor basically tops up her/her SIP by a certain percentage every year.

Mantra for SIP: SIP’s work best over a period of time & the best time to start an SIP is today.

Systematic Transfer Plan or STP allows investors to transfer money from one fund to another in small amounts, on a regular basis. It’s a strategy where investors can park a lumpsum amount in the safest mutual funds for e.g. liquid, ultra-short, arbitrage. They can gradually shift a fixed sum into another fund with a long-term investment objective for e.g. equity funds.

However, putting money in equities at one go is not safe. This holds true not only in today’s market but also at any time you want to invest a bigger sum in equity funds. This is where a systematic transfer plan or an STP helps.

STPs help avoid the risks arising out of market timing. STP is the best investment option when investing a lumpsum at the lowest price. However, it is not a wise choice to invest large sums of money in equity at one go. You may invest when the markets are high. It’s also hard to predict where the markets might go. Therefore, the smart investor invests the lumpsum in debt funds and sets STP to the desired equity fund. This way the investor’s money gets 8-10% returns while staying regularly invested in equity funds.

For us, the markets are always high. Ideally there is also no better time than today to invest. It’s difficult to time the markets. Therefore, whenever you want to invest a lump sum amount, consider investing in debt funds and setting up an STP. The exception is if you are taking a call (bet) on the market or certain sector for having high growth in the near future.

  • STP is possible within the same mutual fund house.
  • The fund where the amount would be redeemed is always a low-risk fund. If your source fund is also a high risk fund, the STP benefit is lost. A short-term fall in the NAV of the source fund will mean that you may be booking a loss at the time of redemption. To avoid this, a liquid fund is the best option as they deliver the least losses even on a daily basis.
  • Choose source funds that have no exit load.
  • STP is executed as redemption in one fund and purchase in another, on the same day for taxation purpose.
  • Select the target fund based on the investment goal.

There Are Three Types Of STPs

  • Fixed STP: The investor chooses a fixed amount of money to put from one investment to another.
  • Capital Appreciation STP: Investors invest the profits of the source scheme in another scheme.
  • Flexi STP: The investor has the choice to transfer the variable amount and is dependent on volatility in the markets.

SWP stands for systematic withdrawal plan, which allows investors to withdraw a fixed sum at pre-determined intervals. It allows you to withdraw the invested amount on a set date, which can either be annually, half yearly, quarterly or even monthly. Choosing an SWP option allows you to customize the cash flow as per your needs. An SWP is beneficial to those investors who require liquidity as it allows them to access their money exactly when they need it.

  • Regular cash flows allow investors to meet their periodic needs from their existing investment.
  • Withdrawals done through SWP are not subject to tax deduction at source. However, the capital gains on the withdrawal are taxable.
  • Registering an SWP helps the investors to eliminate the timing bias in terms of redeeming the investments.

There are two types of withdrawal options in SWP

  • Fixed Amount: When you choose the fixed amount of SWP, you will receive the fixed amount at a regular interval like monthly or quarterly.
  • Appreciation Amount: With appreciation amount option, you get only the appreciation amount at regular intervals, like monthly or quarterly basis.

SWP allows investors to continue to get regular income from equity fund and to optimize the tax on LTCG (Long-term Capital Gains Tax) accrued on the amount withdrawn via SIP.

Investors can avail of the tax benefits on long-term capital gains on up to Rs 1 lakh. Investors will be liable to pay taxes only on gain over and above Rs 1 lakh.