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Use SIP and STP for investing, SWP while redeeming
Published On , 5 Jul 2017 By ET Wealth
Investors get swayed by short term swings in the market, especially in the stock market. And such swings could be in either ways. When the market is on a sudden slide, a large number of investors tend to get out. Again in times of bull rally, several investors sell out early. As a result these investors miss out to take full advantage of the power of the market to create wealth in the long run.
Are there ways to get out of this? Putting money in mutual funds through the systematic investment plan (SIP) route is one of the solutions.
Systematic transfer plan (STP) is another one while the third, which is a smart way to redeem the wealth created over the long term, is the systematic withdrawal plan (SWP).
SIPs work almost like a bank recurring deposit. In SIP, you pre-fix an amount that you want to invest every month or every quarter in a particular fund. On the pre-fixed date, the amount is debited from your bank account and invested in the fund.
SIPs help investors to not bother if the market is high or low.
At market’s lows, the investor gets more units while he gets lesser number of units when the markets are high.
Over the long run the price is averaged out
How STP Works
When you get a big bonus or there’s a large inflow of money, don’t invest all of that in one shot.
First invest that money in a Liquid Fund, which rarely witness any substantial volatility in the short run.
Then set up an STP from that Liquid Fund to another fund (depending upon your investment horizon and risk appetite).
Over the next six months to a year, a fixed amount will be transferred to the fund you have selected while the balance amount remains safe in your Liquid Fund.
How SWP Works
After you have created wealth by investing over several years, you should enjoy that money. In such situation SWP comes in handy.
An SWP helps you withdraw a fixed amount from your mutual fund corpus on a fixed date every month/quarter.
Through SWP you enjoy the wealth you have created, while at the same time the corpus which is remaining in a fund keeps growing.
IN THE LONG RUN PATIENCE PAYS
Over a 23-year period, legendary fund manager Peter Lynch gave a return of about 29.2% in the funds he managed. This basically meant he doubled investors’ money every two and half years. However, it was seen that a large number of investors in his funds cashed out early and over this 23 year period got a return which was in single digits only.
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