What are some of the popular mutual fund investment plans?

When it comes to mutual fund investment plans, following 3 plans commonly crosses our mind –

Systematic Investment plan or SIP

Systematic Transfer plan or STP

Systematic Withdrawal plan or SWP

While the above plans are mostly known to investors, we feel that all mutual fund investment plans are not suitable for all investors simply because they serve different investment needs.

What is Systematic Investment plan (SIP)?

Over the years, mutual fund SIPs have become favourite investment choice for investors. SIP is a simple and disciplined way to accumulate wealth over long term. SIPs work like bank recurring deposits, except that, they are subject to market risks and are able to generate superior returns compared to recurring deposits.

Investor who have monthly investible surpluses, need to plan their SIPs. SIP calculator online is one such online tool which helps you know how much corpus can be created if you invest a particular sum monthly for certain number of years basis expected returns. The SIP calculator online also helps in case you have a goal – You need to enter the goal amount, the period after which you need to achieve the goal and the expected return. The SIP calculator online will instantly display the exact monthly SIP amount with which you should start.

You can also buy mutual funds online. Therefore, a SIP can be setup online from the mutual fund company website.

What are Systematic Transfer Plans?

STP is a mechanism to transfer funds from one mutual fund scheme to another. You can use STP to invest your lump sums in equity funds in a systematic manner by investing in a low risk debt fund like liquid funds and transfer fixed amounts at regular intervals to the equity fund of your choice over a specified period.

Let us assume you have Rs 10 lakh which you want to invest in an equity fund. Let us now assume that market will be volatile for next 6 months. You can invest the lumpsum in liquid fund and transfer equal amounts to equity fund monthly over 6 months. So Rs 1.67 lakhs gets transferred monthly from liquid to equity fund. If NAV of equity scheme keeps falling, with every STP instalment you will be buying higher number of equity fund units. Also, since your liquid fund will increase in value over time, you will redeem lesser number of units of liquid fund for your STP. The twin benefits of rupee cost Averaging and liquid fund returns during the STP tenure boosts your long term returns.

STP is one of the most important mutual fund investment plans and you can setup this through buy mutual funds online.

What is Systematic Withdrawal Plan?

In Systematic Withdrawal Plan (SWP), you can draw a fixed amount from your mutual funds at a specified frequency; you can specify the date when the withdrawal should be made and the amount will be credited to your bank account on that day. You can continue your SWP as long as there are balance units in your mutual fund account.

SWP generates cash-flows by redeeming units at the specified intervals. The number of units redeemed depends on the SWP amount and the scheme NAV on the withdrawal dates. In an SWP, your unit balance will diminish over time, but if the NAV grows at a faster rate than withdrawal rate, in the long term, your investment value will be higher resulting in capital appreciation.

SWP mutual fund investment plans is most suitable for retired investors.

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