When you choose to invest in mutual funds, one of the first terms that you encounter is SIP. As you learn more about investing you also come across terms like STP and SWP. Understanding what each of these terms mean can be confusing. Read on for a detailed explanation of the three letter abbreviations highlighted here.
SIP stand for Systematic Investment Plan. There is a common misconception that SIP is a type of mutual fund scheme, but this is not the case. A SIP is simply a mode through which you can invest in a wide number of equity, debt and hybrid mutual fund schemes.
So, how exactly does SIP work?
Typically, when an investor chooses to invest in a mutual fund with a lumpsum, the amount is relatively high, for example INR 50,000 to INR 1.0 lakh. While this is not always the case, seasoned investors might argue that investing a larger amount through lumpsum produces a better investment outcome in the long-term than a smaller amount.
However, not every individual who would like to start investing can afford to pay a large sum of money in one go. Many investors are salaried employees and can only manage to invest a portion of their income each month after meeting all other expenses. This is where SIP comes in.
Through SIP, an investor can invest in affordable fixed instalments over regular time periods. For example, you could choose to invest INR 5,000 per month in a mutual fund scheme. With SIP, investors from across economic strata have access to investing and building up their investment corpus over time. In fact, in some cases investors could even invest an amount as low as INR 100 per month.
As mentioned earlier, SIP instalments get credited to a mutual fund scheme at regular time intervals. These time intervals range from daily instalments to weekly, fortnightly, monthly, quarterly, and so on. Investors can choose from this range of time intervals to suit their own convenience.
SIP needs to be set up by the investor through their internet banking account. The process involves submitting an OTM (one-time mandate) to set up an ECS (electronic clearing system). This will ensure timely and hassle-free transfer of payments at the scheduled time.
Once the SIP is set up it will continue to proceed as per the instructions in the OTM. This means that the instalment amount and the time interval remain fixed. SIPs do however, allow the investor some flexibility. A SIP can be paused for up to three months or stopped altogether by submitting a request to the AMC. The request takes 30 calendar days to be processed and for the payments to be discontinued.
To change the SIP amount, an investor can send a written request to discontinue the current SIP after which a fresh SIP can be set up with the new amount. Some AMCs also have a SIP Top-Up facility which enables you to increase your SIP by a certain amount automatically each year. This can be set up at the time of initiating the SIP or a Top-Up request can be sent to the AMC for an existing SIP as well.
The convenience of SIP extents to the fact that an investor can set up as many SIPs as they need within a single AMC either for different schemes or multiple SIPs for a single scheme. Investors would however need to check if there are certain rules attached to setting up multiple SIPs for a single scheme, for example, the amounts from different SIPs might need to be credited at different dates of the month.
The benefits of SIP include:
- The convenience of an automatic set-up.
- Investing in affordable amounts.
- The chance to build up the investment corpus over time.
- The advantage of rupee cost averaging.
- The advantage of the power of compounding.
Systematic investment plans have opened up the world of investing to almost everyone who would like to invest. From students to daily wage labourers, using SIP to invest in mutual funds could potentially be a means of financial independence in the long-term.
STP or systematic transfer plan works in a way that is similar to SIP. The major difference here is that you don’t need to set up the ECS facility with your bank but set up a fund transfer within the AMC itself. Let us break this down further:
- For STP you would first invest (through lumpsum or SIP) in a scheme of your choice.
- The scheme could start to earn returns after some amount of time.
- An STP can be set up to periodically transfer some of these returns from the existing scheme to another scheme within the same AMC.
What is the purpose of STP?
A STP could serve several purposes including:
- Growing an investment corpus in a relatively low-risk scheme before transferring some amount to a high-risk scheme with a higher potential for returns commensurate to risk.
- In this way the investor does not need to use a portion of their primary income to make an investment.
- An STP can also be used to diversify the portfolio by transferring funds from one scheme to another with a different investment strategy and asset allocation.
- This process can also be used to transfer returns from high-risk schemes to relatively lower risk schemes in order to protect the investment. The transfer could be done a year or two before the end of the investment period to ensure that at the time of redemption sudden market fluctuations won’t cause extreme losses.
When starting an STP you might want to consider staying invested in the original scheme for at least a year to allow growth of the investment before you start the transfer.
An SWP is a Systematic Withdrawal Plan. By now you must have got the hang of how systematic plans work and from the word withdrawal you have a big hint about what an SWP is. It is very much like a SIP but in reverse. With an SWP you can set up an OTM that dictates a fixed amount to get credited from your investment to your bank account. An SWP could serve as a secondary source of income and can be set up to take place at regular time intervals.
An SWP can be set up by registering with selected SWP schemes. A SWP request form will need to be filled up and submitted to the AMC. As per the details a certain amount will with withdrawn for the investment and credited to your bank account. You could choose to withdraw a fixed amount or a variable amount based on redeeming a fixed number of units. For example, if you are holding 12,000 units of a mutual fund scheme, you could choose to withdraw INR 10,000 per month, or an amount equal to selling 10 units of the scheme. An SWP can be set up to be monthly, quarterly, semi-annually, or annually.
All these three features: SIP, STP, and SWP have made investing in mutual funds not just affordable but also highly convenient. They allow investors to meet their short-term expenses while having the potential to create wealth in the long-term through their investments.
Article Shared by ICICI Mutual Fund