Mutual funds are a popular and sometimes the most tried investment solution, as they allow flexibility, and a variety of options tailored to meet different financial goals. The biggest advantage of mutual funds is for people who want to enjoy investing without the hassle of keeping a constant watch on the market and researching companies. As an investor, you have many ways to invest in mutual funds. The primary methods are lumpsum and SIP.
Lump-sum investment allows you to invest in mutual funds at one time and a fixed amount of money for a fixed duration. You can invest in the same or different mutual funds multiple times with a lump sum amount. This is useful for the investors who can accumulate some funds at different periods of time, like the bonus money or any sudden income or financial gift.
SIP, or Systematic Investment Plan, is another way to invest in mutual funds, as it allows you to invest a fragment of an amount periodically in a choice of mutual funds. This method is useful for new investors who are building the habit of investing and for investors who want to start small. Even for experienced investors who like to stay invested in the long term, they can opt for SIP.
A lot of times SIP and mutual funds are used interchangeably, but please note that SIP is a method of investing in mutual funds; it is not the mutual fund.
Investing in mutual funds with SIP not only helps you become a consistent and disciplined investor, but it also gives you the benefit of rupee cost averaging, i.e., SIP allows you to buy more units of mutual funds when markets are slow or in bearish mode, and it will buy fewer units when markets are high, overpriced, or in bullish mode. This helps you realise your return on investment and reduces market volatility in your portfolio.
You have an option to start an SIP and stay invested for a defined period, like 3 years, 5 years, or more. Or you can opt for a perpetual SIP that will keep going until you stop the investment.
You also have the option of Step-Up SIP; this allows you to increase the amount of your SIP value by a certain percentage in a fixed tenure. For example, you have opted to invest in an equity mutual fund for a period of 3 years or more. The SIP amount you have decided to invest in is Rs 2,000 every month. In case you opt for Step Up SIP, you can increase the value of your SIP contribution by 10% after the completion of one year. So, your monthly investments go to Rs 2,200. You can set this value to more than 10% as well. Why is this helpful? It helps you to remain consistent with your investments and, hopefully, with increased income, automatically adjusts your investment. With more invested money, your overall portfolio gets compounding benefits for its larger value.
In case you forgot to opt for Step Up SIP, you can also start another SIP of the incremental value from the time you wish to start.
What is STP (Systematic Transfer Plan)?
STP is a method that allows you to transfer a fixed amount (or units) from one mutual fund scheme to another at regular intervals. Investors often use it to transfer funds from a debt fund to an equity fund or vice versa.
Suppose you have Rs 2 lakhs in a debt fund but want to gradually shift it to an equity fund. Instead of transferring the entire amount at once, you can schedule an STP to transfer ₹10,000 every month from the debt fund to the equity fund. This approach reduces the risk of market timing and ensures a smooth transition.
STP is suitable for investors who have a lump sum amount and want to avoid investing it all at once in a volatile market.
What is SWP (Systematic Withdrawal Plan)?
SWP is the reverse of SIP. Here, you systematically withdraw a fixed amount (or units) from your mutual fund investment at regular intervals. It’s an excellent tool for creating a steady income stream from your investments.
Let’s say you have Rs10 lakh invested in a mutual fund. Through SWP, you can set up a monthly withdrawal of Rs.10,000. Your bank account receives the amount, and you redeem the corresponding units from the mutual fund.
SWP is advantageous for investors who require regular investments, such as retired individuals or middle-aged investors who aim to meet their children's petty cash needs or assist their elderly parents financially. SWP gives the benefit of an additional income without liquidating your entire investment.
However, one should consult a financial advisor to determine the optimal SWP plan withdrawal percentage because if you withdraw more than your portfolio returns, you will reduce your principal investment and portfolio volume.
Which Option Should You Choose?
The choice between SIP, STP, and SWP depends on your financial goals:
- Choose SIP if you’re looking to build wealth over the long term through regular investments.
- Opt for STP if you have a lump sum and want to gradually invest in equity or balance your portfolio.
- Use SWP if you need a regular income from your investments.
We hope this blog has helped you understand the differences and will let you choose wisely.