Systematic Investment Plans (SIPs) are clearly growing popular in India every year. As of December 2023, an astounding 7.64 crore SIP accounts were already present out of which 40.33 lakh new SIPs were registered in November 2023 itself.
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Apart from this a total of Rs 17,610 crore total was invested in December 2023 alone. Data source: AMFI. This pattern has highlighted an interesting shift in the investor’s preference. They are now evidently choosing organized and methodical ways of money management.
In addition to SIPs, Systematic Withdrawal Plans (SWPs) and Systematic Transfer Plans (STPs), have also become essential tools for investors in the current investment scenario. These tools provide techniques so that everyone who invests can meet a range of financial objectives and demands. Here we will discuss all three and understand which tool is the best for whom –
1.SIPs
A key component of long-term wealth creation is SIPs (Systematic Investment Plans). When investing via SIPs, investors pledge to invest a set amount into a selected mutual fund on a regular basis. The strength of SIPs is found in the characteristics of compounding and rupee cost averaging. Rupee cost averaging allows investors to get more units of a fund during periods when the NAV is low and fewer units of the fund when the NAV is higher, averaging out the cost over time.
To understand SIPs better, imagine if an investor invests Rs 5,000 per month for 20 years in an equity fund. With an assumed 12.64% yearly average return, the initial investment of Rs 12 lakhs may increase to almost Rs 54.51 lakhs, demonstrating the significant effects of compounding and disciplined investing.
2.SWP
SWPs (Systematic Withdrawal Plans) are a tactical instrument for establishing a reliable revenue stream, particularly during retirement.
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When setting up an SWP, investors can regularly take a predetermined amount from their mutual fund investment. This offers the investor consistent financial inflows, akin to a wage or pension.
For example, a balanced fund investor with a capital of Rs 50 lakhs can choose to have a monthly SWP of Rs 25,000. This plan enables the residual corpus to continue growing in the mutual fund, while the investor receives a consistent sum withdrawn into his bank account. The tax efficiency of SWPs gives this strategy additional appeal, especially in equity-oriented funds. When utilizing a Systematic Withdrawal Plan (SWP), tax obligations are incurred solely on the capital gains generated from the withdrawn amount. Short Term Capital Gain (STCG) are taxed at 15% & Long Term Capital Gains (LTCG) are taxed at 10% over and above basic limit of Rs 1 Lakh when the SIP is from an equity fund. Gains on an SWP from a debt a fund whether LTCG or STCG are taxed at the investor’s tax slab.
3.STP
When it comes to shifting assets from one asset class to another and controlling market risks, STPs are extremely essential. An STP makes it possible to gradually move a certain amount from one mutual fund (usually a lower-risk fund) like a liquid or debt fund to another, (usually an equity fund) with a greater risk profile. Due to this, the risk associated with market timing is reduced.
For instance, over the course of a year, an investor may start a STP of Rs 5,000 a month from a debt fund to an equity fund. This approach leverages the potential growth of stock markets and permits a more measured exposure to equities, so mitigating the effects of market volatility.
As you can see, each tool has its own benefits and features, hence the choice by the investor should be made based on individual financial goals, risk tolerance, and time horizons.
