A systematic investment plan (SIP) is a plan in which investors make regular, equal payments into a mutual fund, trading account, or retirement account. SIPs allow investors to save regularly with a smaller amount of money while benefiting from the long-term advantages of rupee-cost averaging (RCA). By using a RCA strategy, an investor buys an investment using periodic equal transfers of funds to build wealth or a portfolio over time slowly.
- Disciplined investment approach
- Allows you to start small and increase the investment amount gradually
- Comes with two beneficial investment strategies:
- Power of compounding- the returns are compounded making the amount huge
- Rupee cost averaging- balances out the risk and volatility
- Easy to use
- Timing the market is not required
An SWP allows you to withdraw a specific sum of money from a fund at regular intervals. Such a system is particularly suited to retirees, who are typically looking for a fixed flow of income. SWPs provide the investor with a certain level of protection from market instability and help avoid timing the market.
Generally, one opts for an STP when there is a lump sum to invest. Like a SIP, an STP helps spread out investments over a period of time to average the purchase cost and rule out the risk of getting into the market at its peak. However, with an STP, you invest a lump sum in one scheme (mostly a debt scheme) and transfer a fixed amount from this scheme regularly to another scheme (mostly an equity scheme).
The basic idea behind an STP is to earn a little extra on the lump sum while it is being deployed in equity, since debt funds provide better returns than a normal savings bank account.
Depending on the lump-sum amount, the investor can decide the period over which he wants to deploy the money in the market. Typically, the larger the amount, the longer the time period.
An STP can be done from an equity fund to a debt fund as well. If you are saving for an important goal like your child’s education, buying a home or retirement and you are nearing your goal, don’t wait till the target date. Begin moving your money from equity to debt well before the time when you will need the money.
Following are the benefits of STP
- Consistent returns
- Cost averaging
- Portfolio Re-balancing
Types of STP
- Fixed STP: A fixed amount is drawn from investment and invested in another.
- Capital appreciation STP: The profit gained from one investment is drawn out and invested in other.
- Flexi STP: A flexi-STP allows you to keep one set of funds in one investment type say debt funds and transfer it to other type say equity funds depending upon the market condition.