A Mutual fund Systematic Investment Plan (sip), Mutual fund
Systematic Transfer Plan (stp) and Mutual fund Systematic Withdrawal Plan (swp)
are different modes of investing into mutual funds.
It is a common misconception that these are various types of
mutual funds but they are not, they are only the various methods by which you
can invest in mutual funds.
All the three modes of investing in mutual funds have their
own features, advantages and serve specific purposes.
What method you choose to invest via would then again be
dependent on several factors like your age, goal, time horizon, etc. in short,
your risk profile.
Systematic
Investment Plan
What
is a SIP plan?
A sip plan in a mutual fund is a mode of investing via which
you can make periodic investments into mutual funds if you do not or cannot
make lumpsum investments.
The period could be:
- Daily
- Weekly
- Monthly
Which date is best for mutual fund SIP?
No matter what date you pick for your sip plan, it will make
no difference to your overall mutual fund portfolio.
No one date is better than the rest and vice versa for a sip
plan.
What is important is that you are disciplined with your sip
plans and not what date you invest on.
How long does it take to start sip?
You need to register your sip plan at least a month before
the desired date on which you want your first instalment to be deducted.
It takes 30 working days for a fresh sip plan to be
registered in a particular mutual fund scheme.
Keep in mind that 30 days here mean 30 ‘working days’.
In the same manner, you also need to put in the application
to stop your sip plans at least 30 working days before your next installment.
What is minimum period for sip?
A sip plan in a mutual fund needs to be registered for a
minimum period of 6 months.
The maximum differs from one mutual fund to another, some
allow up to 3 years and some up to 5 years.
Most mutual funds generally allow the continue until stopped
option.
What happens if you miss sip payment?
In case you miss one sip plan installment then the sip plan
would not be deducted for that one month but would continue as usual from the
next month.
You would not be penalized for missing a sip plan installment but your may bank may fine you for the same, this varies from bank to bank.
In case you miss 3 sip plan installments on the trot then
your sip plan ceases automatically.
Does sip have a lock in period?
No, sip plans do not have a lock in period except for tax
saving elss mutual funds.
You can stop and redeem your investment as and when you
desire.
You will have to pay exit load of 1% in case you redeem your
sip plan installment before it completes 1 year however.
Only in the case of a tax saving elss mutual fund, each sip installment would be locked in for a period of 3 years from the date of investment.
What happens when sip expires?
When a sip plan in a mutual fund expires, the investment
amount stays in the same fund as it is.
Of course, the market movements from time to time do affect
its valuation.
The investment amount is not automatically credited back to
your bank account until and unless you redeem your investments.
Is sip in mutual fund tax free?
Every mutual fund investment, be it equity or debt, sip or
lumpsum or stp attracts a stamp duty of 0.005% from 1st July 2020
onwards.
This will also be applicable on sip
plans registered before 1st July 2020.
If you are a long - term investors
(ideally should be) then this would not affect your mutual fund investment much.
You would need to pay short term capital gains tax in equity
funds for units that have not completed 12 months and in debt mutual funds for
units that have not completed 36 months.
For period of more than 12 months in
equity mutual funds and 36 months in debt mutual funds, you would need to pay
long term capital gains tax.
Can I stop sip for a few months?
Yes, you can stop your sip plans for a few months.
Most mutual fund houses provide the option of pausing sip
plans for a period of upto 3 months.
Ideally it is better to pause than to stop your sips
completely or else when you start again, you would need to register fresh sips.
It’s better to pause and restart than to stop and register
fresh sip plans.
Can I stop sip without redeeming?
Yes, you can stop your sip plans without redeeming the
accumulated amount.
The accumulated amount will stay in your mutual fund until
and unless you redeem it.
Sip plans advantages
A sip plan in a mutual fund helps you:
- Stay disciplined
- Invest small amount gradually
- Average your investments
- Not worry about timing the market.
Systematic
Withdrawal Plan
What is swp in mutual fund?
A systematic withdrawal plan in a mutual fund is a plan
which allows you to withdraw a specific amount at regular intervals.
A systematic withdrawal plan in a mutual fund is somewhat
the opposite of a sip plan, in a sip plan you can invest on a monthly basis
whereas in a systematic withdrawal plan you can withdraw on a monthly basis.
How do I start a mutual fund swp?
Step 1
Invest a lumpsum amount in the mutual fund scheme of your
choice for a minimum period of 3-5 years.
The longer the better as is the case with any equity mutual
fund.
You can increase or add to the initial lumpsum investment
amount as and when you wish to.
Step 2
Based on your income requirement you would need to decide on
- Date of withdrawal
- Amount of withdrawal
- Frequency of withdrawal
- End date of withdrawal
How does swp work in mutual funds?
In a systematic withdrawal plan you first need to either
make a lumpsum or do a sip plan for as long as possible.
Let the lumpsum amount or accumulated sip investment amount
stay invested for as long as possible.
Once the invested amount grows to a certain figure you can
make monthly withdrawals.
This makes sure you do not need to time the market and also
works as a cushion against market volatility.
Is swp tax free?
No, a systematic withdrawal plan in mutual fund is not tax
free.
A systematic withdrawal plan is basically redemption.
You would need to pay short term capital gains tax in equity
funds for units that have not completed 12 months and in debt mutual funds for
units that have not completed 36 months.
If the swp includes a unit that has not completed a year
then an exit load of 1% would also be imposed.
Systematic
Withdrawal plan Advantages
Dividend distribution tax has now been abolished, earlier dividend
received by you was tax free since it was paid by the mutual fund house.
Now you have to pay tax on dividends received.
The higher the tax bracket, the worse it gets.
You end up almost half your income from dividends as taxes
as you go higher up the tax bracket.
There is also no guarantee that the mutual fund will declare
dividend unlike a systematic withdrawal plan.
Systematic
Transfer Plan
A Stp in mutual fund is a mode of investing in which you
make a lumpsum investment in a debt or liquid fund.
You transfer a portion of this lumpsum investment (debt or liquid)
into your primary equity fund either daily, weekly or monthly.
The primary purpose of this exercise is so you do not invest
your entire investment into primary equity fund in one go.
This is all the more important if you feel the market is
overvalued or is currently going through a very bearish phase.
It also helps during a volatile market so you get to average
your investments.
The kind of debt or liquid mutual fund you make the primary lumpsum
investment in would depend upon the duration of your STP plan since each debt
fund varies with respect to their exit loads.
STP plan Advantages
It helps to average your investments.
You do not have to worry about timing the market.
A STP plan is all the more important if you want to invest
into more volatile funds like say mid and small cap funds when they are already
running high.
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