Monday, April 09, 2007



SIP is an ideal route to embark on your journey in the financial markets. It is the answer to preventing the pitfalls of equity investment while reaping rich rewards. A SIP can be useful for a debt fund as help build a pool of savings. It can be thought of as something akin to a recurring deposit where a part of your savings is automatically deducted from your account.

If SIP is for making a disciplined investment in the market, the Systematic Withdrawal Plan (SWP) is a disciplined way of unwinding your investment. If you keep booking profits in predefined successions, you avert the risk of getting stuck should the market fall suddenly. This happens rather frequently in our system where liquidity and therefore depth is rather low. The amount of withdrawal can be subject to the minimum limit set by the asset management company, your requirements, as well as the corpus invested. You will have to leave instructions with the fund on the periodicity of withdrawal (monthly or quarterly), a date for each withdrawal and the delivery of the money.

Fund houses such as Franklin Templeton, HDFC Mutual, Birla Sun Life and Kotak Mahindra Mutual offer two sub-options within the SWP — Fixed and Appreciation. Under the Fixed SWP, you can choose to receive a fixed sum, say, Rs 1000 a month, over a specified number of months by way of systematic withdrawals. Under the Appreciation option, you can leave instructions with the fund to redeem units only to the extent of the capital appreciation, if any, earned on the units. A few fund houses such as PruICICI Mutual Fund and UTI Mutual Fund offer a Trigger facility that is a variant of the Appreciation SWP. The Trigger facility saves you the bother of having to keep track of your investment; you can leave instructions on booking profits on fund holdings when a specified `trigger', say appreciation, stop loss, etc. is reached.

SWPs are an ideal way to supplement your monthly cash flow, reinvest periodically in other instruments or meet your periodic payment schedules like your EMIs, insurance premiums, your children's school fees etc., without leaving your money idle. The SWP could be a good alternative to the dividend option of a mutual fund, because payouts can be timed to your convenience, instead of you having to wait for the fund to declare dividends.

You have made big money on equity fund investments over the past year and want to plough the capital gains into safe investment avenues - a Systematic Transfer Plan (STP) or Drip Investing could be the answer. A STP allows you to make periodic transfers from one fund into another managed by the same fund house. As with a SWP, you have to specify the instalment and the periodicity of the transfer. Fund houses usually offer monthly and quarterly STPs. But a few funds, such as PruICICI, allow systematic transfers even at weekly intervals. The STP can be a useful facility to re-balance your portfolio or to phase out investments in a fund over a period. You can invest a lump sum in a liquid or floating rate fund and leave instructions to transfer Rs 1000 every month into an equity fund. Or you can transfer a fixed sum every month from a debt to an equity fund. While many fund houses permit STPs from debt to equity funds, only a few allow the reverse. Franklin Templeton, PruICICI and Birla Sun Life allow systematic transfers out of their debt schemes and into their equity funds, but not the reverse. Kotak Mutual Fund permits two-way STP. STPs, too, offer a choice between a Fixed and an Appreciation option. A Fixed option STP allows you to sweep a fixed sum at periodic intervals into another fund. The Appreciation STP is activated only when the capital appreciation on your investment crosses a limit you have set.

Unlike SIP, in STP no entry loads will be levied on the equity and balanced schemes being entered into. However a CDSC equivalent to the entry load is levied for redemptions made within a year of investing. Also unlike a SIP where you have to cut a number of cheques depending on your investment duration, in STP only one form has to be filled.

Having been exposed to the different modes of purchasing and redeeming mutual fund units, it is time now to take a look at certain circumstances under which you should redeem or sell Mutual Fund units. This is as important as purchase since both the actions together complete the money multiplying matrix of Mutual Fund.

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