Market volatility is a critical factor influencing the returns that an investor can achieve, and various investment strategies aim to minimize its impact. Traditionally, periods of general elections tend to trigger increased market volatility. Over the next six months, as market participants prepare for the upcoming general elections, investors may explore various mutual fund investment strategies. This guide from ET elaborates on how and when to employ strategies such as Systematic Transfer Plan (STP), Systematic Withdrawal Plan (SWP), and Systematic Investment Plan (SIP).
Understanding Systematic Transfer Plan (STP): STP is an investment tool that enables investors to transfer funds from a primary scheme (an existing investment) to a secondary scheme, be it debt or equity. Investors can set instructions for daily, weekly, or monthly transfers between schemes.
Factors Influencing the Suitability of STP: The appropriateness of using STP hinges on factors such as the investor’s age profile and objectives. For instance, a 58-year-old investor with a Rs5 crore corpus might opt to shift funds from equity to debt schemes to secure stable returns during heightened market volatility. Conversely, a younger investor might prefer transferring money from debt to equity schemes to capitalize on market fluctuations. The key idea is to diversify investments rather than making lump-sum investments, which are more susceptible to volatility.
Systematic Withdrawal Plan (SWP) Explained: Investors gradually build the value of their portfolio over time, and SWP allows them to periodically withdraw funds from their invested schemes.
Optimal Timing for SWP: Investors typically withdraw funds on a monthly basis according to their financial needs. Experts recommend initiating withdrawals a year before the desired goal’s timeframe if it’s a long-term objective. For example, if funds are required in 2026 for children’s education, the withdrawal process can commence in 2025.
Long-Term Benefits of Systematic Investment Plan (SIP): SIP is hailed as an inclusive investment tool, leveling the investment playing field, even for those with lower incomes. With a minimum investment as low as Rs500 per month, money is automatically debited from the investor’s bank account, and units of a chosen scheme are purchased accordingly. In times of market volatility causing a decline in the Net Asset Value (NAV) of a scheme, more units can be acquired through SIP. The power of compounding comes into play as investments are held for the long term. Equity scheme share prices rise over time due to improved earnings, enhancing the NAV of mutual fund schemes. Therefore, investors can strategically deploy funds into equity schemes through SIP in a staggered manner for the long term, especially for periods exceeding five years.
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