SIP / STP / SWP / Triggers / FMP

Mutual funds offer a whole bunch of flexible investment options to help you invest in a basket of asset classes.
learn-sip

Systematic Investment Plan (SIP) is an option where you invest a fixed amount in a mutual fund scheme at regular intervals. For example, you can invest 1,000 in a mutual fund every month. It is a disciplined investment plan and helps reduce propensity to market fluctuations. It is a convenient tool that helps you preserve capital and also render significant wealth creation in the long-run.

SIP investments can help you reach your financial goals by taking advantage of rupee cost averaging, and growing your investments with compounded benefits.

 

 

SIP has several advantages over one-time investment. Some of the advantages are mentioned below:

  • Disciplined approach to investments
  • Flexibility to invest small amounts every month
  • Benefit from the power of 2 powerful investment strategies
    • Rupee cost averaging – helps counter volatility
    • Power of compounding – small investments create a big kitty over time
  • Convenient and hassle-free mode of investment
  • No need to time the market

Rupee Cost Averaging is an effective mechanism which helps in eliminating the need to time the market. Under this method, one need not be concerned about when and how much to invest. A fixed sum of money can be invested regularly and over time it averages out the costs. Say, you invest 1,000 a month, and, the price of the selected mutual fund scheme unit is 10 in the first month, you will get 100 units.

In the next month, if the unit price falls to 9, you are allotted 111 units. In the third month, if the price drops further to 8, it can get you 125 units. Thus, by investing 3,000 over three months, you will get 336 units.

On the other hand, had you invested the entire amount in the first month itself, you would have gained just 300 units. In case of SIPs, the average unit cost is about 8.9 as compared to 10 in case of lump sum investments. Thus, SIPs help lower the average unit cost and can buy you more units

You can gain from compounding by reinvesting the money you earn from your investments to earn even more. The earlier you start, the longer your money has the opportunity to compound and enhance your corpus helping you achieve your financial goals.

Below is an example for a SIP of 1,000 invested per month @8% till the age of 60.

Starting Age Total Amount Saved () Value at the Age of 60 ()
25 4,20,000 23,09,175
30 3,60,000 15,00,295
35 3,00,000 9,57,367
40 2,40,000 5,92,947

Thus, the power of compounding can have a considerable impact on your wealth accumulation, particularly if the investment is for a long period of time.

Register for SIP by signing up the required forms of periodic investments (monthly/quarterly) based on your suitability. Your account will be automatically debited on the requested date to purchase the units of the required fund.

SIP is a simple, convenient and affordable way to invest for your future. With as little as 1,000 every month, it’s an effective method to invest in the growth potential of Mutual Funds.

STP

An STP is a plan that allows investors to give consent to a mutual fund to periodically transfer a certain amount / switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house. Thus at regular intervals an amount/number of units you choose is transferred from one mutual fund scheme to another of your choice. This facility thus helps in deploying funds at regular intervals.

  • Consistent Returns – Through STP, you can transfer your money to a target equity fund while you are invested in a debt or liquid fund. Therefore, you will get the returns of the equity fund you are transferring into and at the same time remain protected as a part of your investment remains in debt.
  • Averaging of Cost – Like SIP, in STP too, a fixed amount of money is invested in the target fund at regular intervals. Since it is similar to SIP, STP assists in averaging out the cost of investors by purchasing more units at a lower NAV and vice versa.
  • Rebalancing Portfolio – STP facilitates in rebalancing the portfolio by allotting investments from debt to equity or vice versa. If your investment in debt increases money can be reallocated to equity funds through an STP and if your investment in equity goes up money can be switched from an equity to a debt fund.

The investor needs to select a fund from which the transfer should take place and a fund to which the transfer is taking place. Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen and the options available with the AMC.

If an investor chooses to transfer from a liquid fund to an equity fund, the lump sum is invested in a liquid or a floating short-term plan and is transferred at regular intervals to a specified equity fund. For example, if one has 50,000 to invest in equities; he can put the entire amount in a liquid plan and go for a monthly SIP of 5,000 in an equity plan through an STP.

STPs can carry Exit Loads as per the respective schemes of the AMC.

A Systematic Transfer Plan is of three types; Fixed STP, Capital Appreciation STP and Flexi STP.

Fixed STP - In Fixed STP, the investor takes out a fixed sum of money from one investment to another.

Capital Appreciation STP - In Capital Appreciation STP, the investor takes the profit part out of one investment and invests in the other.

Flexi STP- In Flexi STP, the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.

Thus, STP is particularly suitable to investors who have lump sum money and wish to invest in equity funds but are wary of timing the market. They can then choose to park the lump sum money in a liquid or debt fund and use the STP option to systematically transfer a fixed amount of money at regular intervals into the target equity fund.

SWP

Systematic Withdrawal Plan (SWP) / Regular Withdrawal Plan (RWP)

An RWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals. It allows investors a certain level of independence from market instability and helps in avoiding market timing. The investor can reinvest the redeemed cash in another portfolio or use it as a source of regular income.

Regular Income - RWP helps in creating a regular flow of money from investments on a periodic basis i.e. on a monthly or quarterly basis.

Tax Benefit - Instead of selling all the units at once, spanning the income across multiple intervals can lower the total tax. It is a tax efficient way of receiving regular income.

Avoid market fluctuations - It saves an investor from market fluctuations, as regular withdrawal averages out return value.

An RWP allows you to withdraw a fixed sum of money every month or quarter depending on the option chosen and instructions given by you.

Let's say Ashish has 10,000 units in a mutual fund scheme on 1-Dec-11. He intends to withdraw ₹6,000 every month through RWP.

Date Opening Balance (Units) NAV Units Redeemed Closing Balance
1-Dec-11 10000 20 300 (6000/20) 9700
1-Jan-12 9700 18 333.33 (6000/18) 9366.67
1-Feb-12 9366.67 22 272.73 (6000/22) 9093.94

In this manner, units from mutual fund holdings will be redeemed in a systematic way to provide the investor with regular income.

Fixed Withdrawal: In a fixed withdrawal option, the investor specifies the amount he wants to withdraw from his investment on a monthly/quarterly basis.

Appreciation Withdrawal: In an appreciation withdrawal option, the investor withdraws only the appreciated amount on a monthly/quarterly basis.

An RWP can help investors who require liquidity as it permits them to access their money precisely when they need it to meet their needs.
Triggers

 

Trigger facility is an additional, optional feature provided in mutual fund schemes, which enables investors to book profit automatically at a pre-defined time or value. In another words, the fund declares a dividend, redeems and/or switches the units automatically on behalf of the investor on the date of the event.

Principal Mutual Fund has introduced the option of Triggers in its funds. You can specify a specific event, which may be related to time or value, in advance and when this event takes place the trigger is activated. Thus, this facility enables you to keep track of your investments without having to put in time and effort to track portfolio movements on a regular basis. It also helps you maintain a disciplined investment approach that ensures that you meet your investment goals. Triggers are of three types –time-based, value-based and event-based

Time-based triggers are activated on a particular date that you have specified. For example, if you wish to gift some units to your mother on her birthday, a trigger can be set for that date.

These triggers are based on the change in value of your investments. For example, you need 7.5 lakh for meeting the expenses of son's higher education after 5 years and you have invested 5 lakh in an equity scheme for this. If you set a trigger for change in investment value by at least 50%, the money is shifted to a low risk scheme as soon the value reaches that figure. In this way, the dream of your son's higher education will not go sour even if the market turns bearish.

You can also set triggers based on the occurrence of a particular external event that affects the value. For example, you want to set the Sensex value of 20,000 as a trigger. If the Sensex is less than 20,000 on the date of allotment, the trigger would be activated when the Sensex closes above 20,000. However, if the Sensex is more than 20,000 on the date of allotment, the trigger would be activated when the Sensex closes below 20,000.

FMP

 

What are FMPs?

FMPs are close-ended debt funds with a maturity period ranging from one month to five years. These plans are predominantly debt-oriented, while some may have a small equity component. The fundamental objective of FMPs is to provide steady returns over a fixed-maturity period, thus protecting investors from market fluctuations.

 

FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments, highly rated securities (like ‘AAA’ rated corporate bonds) over a defined investment tenure and sometimes even in bank fixed deposits.

Capital Protection - FMPs provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.

Better Returns - FMPs offer better post-tax returns than FDs as well as liquid and ultra short-term debt funds.

Less Exposure to Interest Rate Risk - As the securities are held till maturity, FMPs are not affected by interest rate volatility.

Tax Benefit - FMPs score over fixed deposits because of their tax effectiveness both in the short-term and long-term.

Lower Cost - Since these instruments are held till maturity, there is a cost saving with respect to buying and selling of instruments.

Double Indexation Benefit - Indexation helps to lower capital gains and thus lower the tax. Double indexation allows an investor to take advantage of indexing his investment to inflation for 2 years while remaining invested for a period of slightly more than 1 year.

A portfolio of FMPs consists of various fixed income instruments with matching maturities. On the basis of the tenure of the FMP, a fund manager invests in instruments in such a way, that all of them mature around the same time. During the tenure of the plan, all the units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return of the plan.

• Investors looking at stable returns over the medium-term
• Investors who are not pleased with returns from traditional fixed income avenues like Bank deposits, Bonds etc.
• Investors who want to invest money for a fixed tenure to meet certain financial goals in the future
• Investors with a conservative and risk averse profile
• Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income

Returns - FMPs are the equivalent of a fixed deposit (FD) in a bank. While, the maturity amount of a fixed deposit in a bank is guaranteed, the maturity amount of an FMP is not guaranteed.

Duration of Investment - FMPs invest as per the tenure of the Scheme i.e ranging from 1 month to 3 years. FDs on the other hand have an investment horizon of 15 days to 10 years.

Taxation -In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab. If you invest in the growth option of an FMP for less than a year, the gains are added to the investor's income and taxed at the investor's slab rate. If you invest in the growth option of an FMP for over a year, you pay either 10% capital gains tax without indexation or 20% with indexation.

Example : The following comparative table shows the returns where an Individual investor has invested 10,000 in a Fixed Deposit and a Fixed Maturity Plan for six months in the dividend option.

 

Particulars FMP FD
Amount Invested 10,000 10,000
Rate of Return 10 10
Projected Maturity Value () 10,493 10,493
Gross Dividend/Interest () 493 493
Dividend Distribution Tax / Short term Capital Gains Tax Rate % 14.1625 33.99
Tax () 61 168
Net Dividend / Interest () 432 326
Post Tax Value () 10,432 10,326
Post Tax Returns 8.76% 6.60%

 


• The investor in this example falls in the highest tax bracket.
• The 10 % return used in the example for FMP is for illustrative purposes only and not assured and the actual returns may go up or down depending on the market conditions. The Fixed Deposit rate is also for illustrative purposes only.

In case of FMPs; all accretions are assumed paid on maturity.