What Is SIP?
Systematic Investment Plan (SIP) is a very easy & convenient mode of making investments in mutual funds on a regular basis. SIP allows one to cultivate a habit of savings & creating wealth for the future by starting early. Offering ease & flexibility, through SIP one can create a planned approach towards investing right. SIP gets auto-debited from the investors account and the amount is invested into a mutual fund scheme that has been specified. The investor then gets a certain number of units which is based on the current ongoing market rate. Every-time a SIP is made, additional units keep getting added to the investor’s account. SIP has proved to be an ideal choice of investments for retail investors who lack resources to pursue active investments.
Benefits Of SIP
CONVENIENCE
Offering a hassle-free mode for investing, one can directly get the SIP amount deducted from one’s bank account via a standing instruction to facilitate auto-debit function.
DISCIPLINED SAVING
By investing through SIP, you commit to saving regularly. So, with SIP, one gets into a mode of disciplined savings along with creating a path of attaining one’s financial objectives & goals.
FLEXIBILITY
With SIP, one can decide and increase/decrease the amount as they wish, although it is always recommended to continue SIP with a long-term perspective.
LONG TERM GAINS
Investing with SIPs leads to long term gains because of the power of compounding & rupee cost averaging. Rupee cost averaging is an automated market timing technique that eliminates one’s need to time the market.
STP (Systematic Transfer Plan)
STP is a way through which one invests a lumpsum amount in one scheme & regularly transfers a pre-defined amount into another scheme of the same mutual fund house. In the long run, STP helps in cutting down risks to a considerable level & earning good returns. Basically, STP means transferring an investment from one asset or asset type into another asset or asset type. This transfer process happens gradually over a period of time.
Further, STP can be classified into three parts:
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- Fixed STP – Here the investors take out a fixed sum from one investment to the another.
- Capital Appreciation STP – Here the investors take out the profit part of the investment & invest it in another.
- Flexi STP – Here, the investor has a choice to transfer a variable amount towards the investment.
Benefits
Helps in Re-balancing Portfolio
Through STP, one can balance their portfolio effectively as this method allows the allocation of investments from equity to debt or vice versa. If your investment equity goes up then it can be switched from an equity to a debt fund.
Consistent Returns
Through STP one can transfer the set amount to a target equity fund while still being invested in a debt or liquid fund. So, an investor stands to gain benefit from the returns of the equity fund to which the funds are being transferred to & at the same time remain protected as a part of the investment remains in debt.
Averaging of Cost
STP helps in averaging out the cost as it assists in buying units when the rates are lower & vice versa.
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