The three systematic ways to manage mange your investment and withdrawal:
Raise your hand if you have ever heard about SIP? However, do you know everything that you should know about SIP? In this article, we will dig deep to understand how SIP works. Also, there are other systematic plans like STP and SWP that can help you to plan your finances in the long run.
Let’s go one by one in detail:
Systematic Investment Plan (SIP)
Most people assume that systematic investment Plan or SIP is different from mutual funds. It is common to hear people say that they have invested in SIP and not mutual funds because SIPs are less risky.
There are two ways to invest in mutual funds: one-time investment (Lump sum) or staggered automatic investment at regular intervals (SIP). SIP is just a way to invest in mutual funds. The underlying risk, stocks or securities remain the same.
Systematic Investment is an effective investment option for salaried people. Once you set up a SIP, whether it is monthly, quarterly etc, the SIP amount will be automatically debited at the pre-defined intervals from your savings account.
One of the most important advantages of SIP is the benefit of rupee cost averaging. Rupee cost averaging helps to take advantage of rising markets as well as falling markets. As the monthly investment is fixed, the fund house will allot you fund units according to your investment amount. When the market is up, the price of a mutual fund unit will also go up. In this scenario, you will be allotted lesser units. And, when the market is down, you will be allotted more units. This helps you to gain more when the market gains.
Systematic Transfer Plan(STP)
Imagine you find yourself with tons of cash. It may be your fixed deposits maturity amount, a gift from relatives, or a bonus etc. You want to invest but don’t want to invest the entire amount of money at one go. In this scenario, a systematic transfer plan(STP) will help you. Here, you park your money in a low-risk fund, e.g., a liquid fund from which a certain amount will be transferred to another fund, say equity fund periodically. (Daily/Weekly or Monthly)
You can set up an STP for the amount that you like and set a period. STP works similarly to SIP and gives you the benefit of rupee cost averaging. Also, another advantage of STP is that the amount lying in the liquid fund will also give you returns and the value of the liquid fund will increase as well.
Systematic Withdrawal Plan(SWP)
Just like you can systematically invest in a fund, you can withdraw from a fund as well. This facility is called the Systematic Withdrawal Plan(SWP). With the help of this facility, you can withdraw a fixed amount of money from a fund at regular intervals say every month. The number of units that will be redeemed will be as per your withdrawal amount. Also, the corpus in the fund will keep on growing.
SWP helps to plan for your retired life. After investing regularly throughout your working years through SIP, you can set a monthly withdrawal plan which will help you to take care of your day to day expenses. Once you are near retirement, you can shift your retirement corpus to a less volatile fund, say debt fund and set up the SWP.
Conclusion: SIP, STP and SWP are three systematic ways to manage your money. The facility that you need to choose depends on your requirements. If you have further queries, you can get in touch with your financial advisor.
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