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While deciding on a mutual fund, do you consider the type of investment plan it offers? Such plans should be an important consideration as they determine the level of flexibility available to investors. Flexibility implies the freedom to invest as a lump sum or at regular intervals, making transfers to different schemes or asset classes within the same fund family, or ensuring regular income at specified intervals. Let us look at some of the general investment plans. | Systematic investment plans (SIP) :
This plan allows regular investments in a fund. The amount can be as small as Rs 500 and can go up depending on the savings potential of the investor. The mode of such regular investment could be a direct debit from the investors’ savings or salary account. SIP proves highly effective in a volatile market as it lowers the average buying cost of the fund units. An investor acquires more units when the market falls and obtains fewer units when it climbs, thereby averaging out the buying cost. The plan promotes disciplined investing and proves effective for small investors who cannot afford to invest large amounts as a lump sum.
Systematic withdrawal plan (SWP) :
It allows investors to periodically withdraw their fund investment and offers the benefits of a regular income. Under this scheme, an investor must withdraw a specified minimum amount, which is paid in the form of a cheque or direct credit to the investor’s bank account. The amount is treated as redemption of units at the applicable NAV. For example, the withdrawal can be on the NAV of the last day of the month or any other date specified in the plan’s agreement. An important point to remember is that SWP is different from a monthly income plan as the former allows an investor to receive the principal or profit, whereas the latter aims at distributing only the income (if generated) on a regular basis.
Systematic transfer plan ( STP) :
This plan offers investors the facility to transfer a specified amount on a regular basis from one scheme to another within the same fund family. A transfer is treated as redemption of units from the scheme from which one is shifting and as an investment in units of the scheme in which one is moving. Such a plan is useful when there are concerns of a bearish trend in equities or when equities are trading at unwarranted premiums to their fair values. In such a scenario, it is advisable to shift from high-risk equity funds to low-risk debt funds in order to avert a likely collapse in the value of investments. Similarly, when the equities are expected to do well, the investments can be transferred from debt funds to equity funds. Such plans enable one to manage one’s investments actively. (There is another category of funds that offers such active churning across asset classes. These are known as asset allocation funds, where a dedicated fund manager churns the investments depending on the outlook of the asset markets.)
Automatic reinvestment plan ( ARP) :
This allows investors to reinvest the dividends or other distributions made by the fund in same fund. The investor receives additional units instead of cash and reinvestment takes place at ex-dividend NAV. Such plans enable investors to reap the benefits of compounding.