Indian stock markets have been pretty volatile. The uncertainty is such that markets can take a plunge in one day and rise up again on the very next day. Investors who have invested in mutual funds through the SIP route have been successful in negating the uncertainties caused due to stock market fluctuations to a large extent.
Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) are two different routes of investing in mutual fund in discipline and systematic manner. SIP as well STP is possible in all kind of open ended schemes whether equity, non-equity or balance MF schemes. Equity is more volatile in nature and hence, more and more people invest in equity scheme through SIP or STP route.
Systematic Investment Plans
Under this method, one invests a fixed amount in a mutual fund scheme regularly on a particular date of every month. Benefit of investing through SIP is that one does not have to time the market. There are consistent deposits which lead to investing in the high as well as low market that help you make the best out of the overall opportunities that were not easy to predict in advance. The investors are required to submit onetime request for regular investment in the particular scheme of mutual fund.
A number of advantages one has while investing through the SIP. The essential benefit is having a dedicated and focused approach towards investment. Though there is a tremendous enthusiasm when people enter into the investment markets but fail to make regular investments. However, this plan reduces the burden later on as there is a predefined condition of investing a specific amount every month. So, one achieves an investment discipline. Also, one enjoys investment convenience. Another big advantage is rupee cost averaging. Because you get more units when market is down and lesser units when market is up, it helps to overcome risk of volatility and helps you generating better returns in long term.
So, the SIP system works where you have money in your bank account, and every month a fixed sum is transferred from your bank to the mutual funds.
Systematic Transfer Plans
Systematic transfer plans (STPs) are suitable for investors who have a lump sum amount to invest, but want to proceed with the SIP way. STP has features and benefits similar to a Systematic Investment Plan. Only difference is that unlike SIP where the fixed amount is debited form investor’s bank account on a predetermined date to be invested in a scheme of a mutual fund, here investor parks a lump-sum amount in a less volatile scheme like liquid or money market mutual fund and gives a standing instruction to the fund house to transfer a fixed amount on a predetermined date in another scheme of the same fund house.
So, the STP system involves investing a whole sum of money in mutual funds, mostly a liquid fund and selling some units of the same to further investing in equity mutual funds.
A frequent question asked by investors who wish to invest through SIP is the time frame of investment. Your financial goals and priorities should be considered before deciding on the time frame of your SIP. Equity has potential to deliver higher returns in long term hence it makes sense investing in Equity Mutual Fund schemes for five years and more. Also, real benefit of rupee cost averaging can be observed only in long term. A SIP offers the double benefit of negating the market volatility and combating the unpredictability in rupee value while gaining optimum benefits from the equity markets. A SIP guarantees a disciplined investment irrespective of the market swings and helps you to reap from the benefits of compounding.
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