Mutual Fund Investments are considered the easiest way to meet a lot of personal finance needs including tax saving, regular income as well as long term capital appreciation. Not to say that there aren’t other investment vehicles that solve these personal finance goals but mutual funds happen to be the simplest way to do so especially for consumers who don’t have a lot of knowledge of how equities work.
Mutual Fund SIPs For Regular Consistent Investing
Within Mutual Funds, SIPs or Systematic Investment Plans have taken center stage as a way to invest in Mutual Funds on a regular basis. Right so too since SIPs are a great way to build discipline into investing by essentially encouraging investors to park a certain amount towards mutual fund investment on a regular basis. Beyond just helping disciplined investing, SIPs are touted as a great way to hedge risks against market upswings through the principle of rupee cost averaging.
The approach to mutual fund investing via SIP is fairly simple. Look at some of the best performing mutual funds; decide a minimum monthly amount that you want to allocate towards one or a few of these mutual funds and just sit back. For instance, a 1000 INR annual SIP per mutual fund per month across 5 mutual funds lets you invest 5K per month for 12 months as a way of diversified portfolio investment. So, while a 5K investment per month may not sound like a lot you will have invested 60K by the end of one year.
While SIPs help you build out a long term capital appreciation plan by just investing relatively smaller portion of your monthly income on a regular basis, what about a scenario where you have a lump sum amount that you want to invest.
Mutual Fund STPs For Lumpsum Capital Investment
We all have situations wherein we are on the good side of a capital windfall. Be it in the form of annual bonus or a full & final from the old employer, we often find ourselves sitting on lumpsum cash that if left to itself would just yield 4-5% interest sitting in a bank account. Activating or increasing the SIP amount at the point is definitely an option to utilize that lumpsum amount but not when there is a better option.
STP or Systematic Transfer Plan is an equally or infact even more powerful way to invest in Mutual Fund but is relatively lesser known. The concept of STP is very similar to an SIP in the sense that STP also involves investing a certain amount on a regular basis in Mutual Funds. However, instead of that regular amount being taken out of your bank account it actually gets transferred from another mutual fund.
For some additional context, an STP essentially involves investing a lumpsum amount in a mutual fund and then setting up recurring (weekly, monthly etc.) investments from this mutual fund into another mutual fund of the same Asset Management Company (AMC).
Simply put, you invest a lumpsum amount in a debt or a liquid category mutual fund (low risk mutual funds that generally yield returns of 6-9%). Once you do that, you then setup STP on this fund and essentially instruct the AMC to take a certain % of the amount invested in this fund to ideally an equity fund (higher returns) on a weekly or monthly basis.
What’s the benefit you ask? The clear benefit is that your lumpsum capital is now yielding 6-8% by being invested in a debt/liquid fund which is anyday better than the 4-5% it would yield in your savings bank account. With a systematic transfer into an equity fund, it now works very similar to an SIP wherein your investments are getting routed to equity funds which have the potential to yield significantly higher returns.
There you have it! SIPs for regular smaller investments and STPs for one time lumpsum investment