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Your Money: How SIPs and STPs help achieve financial goals

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Your Money: How SIPs and STPs help achieve financial goals

By Raghav Iyengar

Have you heard of the phrase ‘Jump on to the bandwagon’? It means participating in an activity or trend without sufficient due diligence. When it comes to investing, this is often the bane of most investors, as they try to ‘time the market’ based on trends. In the process, they are either irrationally exuberant or unrealistically pessimistic, and end up making inaccurate investment decisions.

A simple way to avoid this situation and yet earn reasonable returns is through the systematic investment plan (SIP) route. Mutual fund houses also offer investors the benefit of a systematic transfer plan (STP). This allows investors to transfer their investment from one scheme to another, within the same fund house.

Benefits of SIPs
Small investment amount: SIPs enable you to start investing with an amount as little as Rs 100, which over the long-term can result in wealth creation.
Disciplined investing: SIPs are designed in such a way that they inculcate the discipline of investing over the long-term. A fixed amount automatically gets invested in the scheme of choice, eliminating the need for monthly investments.

Rupee cost averaging: When the NAV is low, SIP assigns more units to an investor, and when it is high, SIP allocates fewer units. This means a lower average cost.

Power of compounding: One of the most compelling reasons to start a SIP is the power to compound money over time.

Benefits of STP
Systematic portfolio rebalancing: One of the biggest advantages of STP is it allows you to rebalance your portfolio based on evolving market conditions or your financial needs. If the equity market is very volatile, you can transfer investments from equity schemes to hybrid or debt-oriented schemes. Once the equity markets have stabilised, the money can be transferred back to the equity or hybrid scheme.

Offers flexibility: You can customise the STP based on their requirements. This includes day, date and frequency of STP (ranging from daily to yearly), the amount to be transferred as well as the number of instalments or duration of the transfer.

Taking the pick: There are three types of STP—fixed, capital appreciation and flexi. Under the first type, the STP amount is decided at the beginning of the investment, whereas in the second, the returns generated from the scheme are redirected towards another scheme. The third type allows investors to transfer a variable amount from existing to a new scheme.

So, SIPs allow investors to adopt a disciplined approach towards long-term wealth-creation. STPs allow them to smartly manoeuvre these allocations. Put together, these can help investors create a comprehensive financial plan that takes them closer to their goals in life.

The writer is CBO, Axis AMC

   

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