- SIP or Systematic Investment Plan is where you can choose an amount that directly gets debited from your Bank Account and is transferred to your Selected Mutual Fund Scheme at Regular Intervals. This can be done Daily, Weekly, Monthly, Quarterly etc. in mutual fund schemes, stocks etc. This is a disciplined way to invest and helps in building financial discipline. It also helps benefit from rupee cost averaging and the power of compounding.
How Mutual Fund SIP Investments can benefit you:
- Saving is not an easy task. The unexpected expenses pop up and then people end up saying next time. Hence SIP tend to promote Regular and Disciplined Investing. By investing through SIP, you commit to saving regularly. This way, you can achieve your financial goals without deviating and that’s how investors can build the habit of investing.
- Compounding: Compounding refers to earning interest on top of the interest you’ve already accumulated on an existing principal amount. It’s a way of growing your savings over time by remaining invested in the market.
- Compounding Benefits: The power of compounding is when the returns on the investment you made starts earning returns. The investments through an SIP can grow into a sizable amount with the power of compounding over a long period of time, on a regular basis. Sip’s let investors benefit from compounding returns, as the returns generated are reinvested. So, the interest earned on your investment earns more interest over the years, allowing you to accumulate a considerable amount for your financial goals which leads to a substantial growth of your investments over time.
- ALBERT EINSTEIN once quoted that the most powerful force in the universe was the principle of compounding.
- Rupee Cost Averaging( RCA): Rupee cost averaging means that when the market is down, you will buy more units, and when the market is up, you will buy fewer units with SIPs. It helps minimize the risk of market volatility which means, when the market is affected, your overall investment is protected in the best way possible. When investing in mutual fund schemes, you may choose one of the two modes of investment- lump sum or SIP. While lump sum implies that you invest all your money at one go; an SIP, on the other hand, is breaking down that amount into small chunks and investing systematically/regularly every month or quarter or any per-defined regular interval. Also make sure, consistency and patience are extremely important when it comes to rupee cost averaging.
- Convenience: Sips are a more convenient form of investment. You can automate Sips to a mutual fund scheme through a bank mandate and ensure that a fixed amount is deducted from your bank account and invested in the chosen mutual fund scheme. You can start small and gradually increase your investment as per your Convenience. Sips offer flexibility in terms of the amount of SIP you want to invest and the frequency of investment, such as weekly, monthly, quarterly, or annually. You could also increase or decrease your SIP amount according to your financial situation. This ensures that Investing remains within reach of everyone.
- Diversification: Diversification might help investors to mitigate unsystematic risks. But it is important to keep in mind that systemic or market risks are generally unavoidable. Investing through Sips in mutual fund schemes offer diversification across different asset classes based on the kind of mutual fund it is – such as, sectors, geographies, different industries, financial instruments, and other categories. By doing so, even if one of the asset classes were to underperform, the resulting losses are compensated by the performing asset classes.
- Suitable for Investors with Long-term wealth creation, retirement planning, and achieving specific financial goals.
- STP or Systematic Transfer Plan is where 2 Schemes from the Same AMC are selected, and the decided amount gets transferred from the 1st Scheme to the 2nd Scheme at Regular Intervals. This can be done Daily, Weekly, Monthly and Quarterly. The purpose of STP is to manage risks and optimize returns by transferring funds from equity funds.
HOW STP WORKS: You select two schemes one is the Source scheme that is (usually a debt fund) and the other is the Target Scheme( usually an equity fund with higher return potential).
- First you need to set up your STP and then decide on the amount you want to transfer regularly that is you can determine the fixed amount you want to transfer from the source scheme at each interval and the frequency of transfers that is you can decide how often the transfer occurs, whether daily, weekly, monthly, quarterly, or annually.
- Automatic transfers: On the chosen date, the specified amount is automatically transferred from your source scheme to your target scheme.
BENEFITS OF STP(SYSTEMATIC TRANSFER PLAN) It is suitable for investors who have limited resources but want to generate high returns by investing in the stock market and who are seeking in reinvesting their money in relatively safer securities such as debt instruments during times of market instability and unfavorable situations.
- Gradual Risk Management: Shifts investments from lower-risk (debt) to higher-risk (equity) funds gradually, managing risk and potential returns. This allows an investor to ensure the safekeeping of his/her financial resources while earning stable returns at the same time.
- Tax Benefits: Transfers between schemes ( target scheme and source scheme) within the same mutual fund house are not considered redemption, so you don’t have to pay capital gain tax on the transferred amount. This makes it tax-efficient compared to selling units in one scheme and investing in another.
- Disciplined Investment: Automates transfers, avoiding emotional decisions based on market fluctuations. Most platforms allow online access and management of STP, making it a quick and hassle-free process.
- SWP or Systematic Withdrawal Plan Mutual Funds also allow you to Withdraw Money Periodically which can be done by the way of SWP, where a decided amount gets credited in the Investor’s Bank Account at Selected Regular Intervals while the remaining Investment Continues to Grow. This can be done Weekly, Monthly, Quarterly, Half-Yearly, etc. You may customize cash flows to withdraw, either a fixed amount or the capital gains on the investment. It is essential to note that dividends are distributed from the profits or gains made by the scheme and are in no way guaranteed every month.
The Benefits of SWP(Systematic Withdrawal Plan)
- Regular Income: Generates a steady income stream from your investments, ideal for retirement or those seeking supplemental income to support their expenses. It allows you to withdraw a pr-determined amount at specified intervals. SWP helps you plan and redeem more effectively. Some investors uses this as a source of pension after their retirement.
- Tax Efficiency: Withdrawing only invested capital avoids capital gains tax in certain cases.Investors are not required to pay any tax deducted at source (TDS) on the funds received through an SWP.
- Avoiding Market Risks: By withdrawing a fixed amount of money at regular intervals, you can avoid the need to time your exit, which can be challenging and more risky.
- Flexibility: You can choose the withdrawal amount and frequency that match your needs. For example, you can set up an SWP to withdraw monthly, quarterly, or even annually.
Therefore, Systematic Withdrawal Plan or SWP Is a powerful tool for generating regular cash flows. Especially for retirement purposes and for those who rely on their savings for their expenses.
- NET ASSET VALUE( NAV):It represents the market value per share for a particular mutual fund. It is the company’s total assets – total liabilities divided by the total number of units. One needs to gather the market value of a portfolio and divide it by the total current fund unit number to determine the price of each fund unit.It is also said that that the more popular a mutual fund is ,the higher is its NAV. Since the market value of the securities changes everyday. NAV of the schemes also vary on day to day basis .
Units of Mutual Funds schemes are allotted at NAV that is the NAV would be declared at the end of the day based on the closing market value of the securities.
- ASSETS UNDER MANAGEMENT: It is the total market value of the Investment a financial institution such as bank deposits, mutual funds and cash reserves owns or manages on behalf of its clients. AUM is handled by the fund managers who supervises the performance of these assets and make investment decisions to help investors enjoy substantial capital appreciation.
The AUM provides a clear picture of the size of a mutual fund. It helps Investors determine the size of a company’s operations relative to its competitors. Higher AUM signifies that the mutual fund has a firm position, making them more liquid, hence attracting more investors meaning the Investor can buy and sell the fund easily.
Impact Of High AUM in Mutual Funds:
- Mutual Fund Asset Under Management hold important role that affects their performance in the financial market. It usually depends on the fund houses, such organizations prefer asset rich as they are more attractive among customers.
- Also as asset manager is allowed to react against changing market opportunities like exiting or entering into a particular Investment when an opportunity arrives. Investors also look at AUM in mutual funds to compare its performance and returns.
Benefit of a Mutual Fund with large AUM:
Firstly, the funds with large AUMs have sufficient holdings to meet any redemption pressure. Even if a few large Investors leave a particular fund, it would not likely impact it.
Secondly, the total valuation of an asset management company is crucial information for all investors so as to determine the rate of profitability earned if invested in such Mutual Funds.
- Fixed Maturity Plan(FMP’s) : FMP’s are debt oriented close ended mutual funds that have have fixed maturities which means the investors are not freely allowed to enter or exit the fund at any time. For Instance: if an FMP has a tenure of 3 years , then the fund manager will invest in securities with a maturity of 3 years. These securities can be certificates of deposits, commercial papers,treasury bills, etc. Hence FMPs may not be suitable for investors having longer goal horizons.
Benefits Of Fixed Maturity Plan
- FMPs are valuable investments for conservative Investors who wants to invest in for a fixed duration and earn stable returns.
- Fmps don’t offer much liquidity due to low transaction volumes. As a result there is no active buying and selling of securities. Therefor Fixed Maturity Plans have lower expense ratios.
- If you remain invested in FMPs having a tenure of 3 years and above ,you can avail 20% long term capital gain tax with indexation benefit which means you can only pay tax on inflation born capital gains. This in turn will help you save considerable tax.
Conclusion:
FMPs are a useful tool for investors who wants to achieve their short-term or long-term goals and are looking for some predictability in the returns which make it a relatively stable Investment option as compared to open ended debt funds.