Invest systematically, through SIPs and STPs, to make your money work towards wealth creation
When it comes to investing, there are several concerns that crop up among investors. Would one be better off investing a lump sum or putting their money regularly? The answer to this question would vary depending on the market conditions and different time frames that one may use to evaluate the outcome. However, often investing small sums regularly over time compared to a lump sum investing has worked favourably in the interest of investors.
Take for instance lump sum investment of ₹1.6 lakh invested in the S&P BSE Sensex on Jan 1, 2020 when the index was 41306.02, would be worth ₹1.87 lakh on April 26, 2021. In contrast investing the same sum over 16 months with ₹10,000 monthly SIP investments in the same index grows to ₹1.97 lakh (Source: S&P BSE Sensex, Calculations: Internal). Most investors seldom have large sums of money to invest in one go, but, have regular monthly savings that could be diverted towards investing systematically every month. The convenience of systematic investment plans (SIP) when investing in mutual funds has found many takers as indicated in the growing popularity of this investment technique.
Regular investing a fixed amount every month or at set periods throughout the year helps you benefit from ‘rupee cost averaging’ where you are effectively buying into the market at different times and benefiting from both low and high prices. You also stand to gain from the power of compounding over time. It also takes the emotion out of investing as you don’t have to worry about when to enter the market, and just have to be confident that bad months will be outweighed by good ones over the long-term.
Investing regularly removes the worry of trying to decide when to invest or withdraw your money. Trying to time the market is difficult and is often driven by emotion and it’s a riskier approach. With SIPs you have the flexibility to increase or top-up your investments when you have more and also reduce your investments, pause it or take a break if circumstances force you to do so. Regular investing is also good for smaller investors as you can slowly build up a sizable investment corpus.
Some investors may view the potential of higher gains when they invest lump sum, but it also puts all your money at risk at the same time. For instance, if the market goes down as you invest in lump sum then it may take some time to come back to what you had originally invested. As it is not possible to predict market movements, an investor can use the Systematic Transfer Plan (STP) facility to invest regularly or move his investments from one to scheme to another as well, in case he wants to de-risk.
In the case of STP, an investor is able to invest lump sum amount in a scheme and regularly transfer a fixed or variable amount into another scheme. Let us understand this with the example of an investor, who invests a lump sum amount in a lower risk fund like debt funds, and regularly transfers a predefined amount into another scheme like equity-oriented funds, for long-term wealth creation. This approach can work well when the investor has a long-term time frame ahead. However, the reverse may equally work well for an investor when they are approaching a sizeable financial goal such as education of children or their own retirement. In such instances, the investor may wish to de-risk their portfolio by transferring monies from equity-oriented funds which are invested in equity markets and could be unpredictable in the short- term to lower risk funds like money market, ultra- short term or liquid funds. STP is like SIP with a twist, and instils disciplined and regular transfer from a lumpsum to achieve a desired financial goal.
Both these systematic investment techniques have variants to provide flexible approaches that investors can use favourably. For instance, in the case of SIPs, it is common to adopt a growing SIP option, wherein the monthly SIP contribution increases over time. Likewise, when it comes to STP, investors could set triggers that would transfer only gains from one mutual fund scheme to another besides the option to choose a fixed sum to be transferred regularly. These options can be used by investors in discussion with their financial advisors to know when it will be useful for them to use such approaches.
Regular investments are great for your peace of mind. Father of Value Investing, Ben Graham, had said that: “Systematic investing will pay off ultimately, provided that it is adhered to conscientiously and courageously under all market conditions.” If you are wondering which of the two options is suitable; there is no either or option between SIP and STP. As investors we may face different situations and go through circumstances when managing our investments may become difficult, which is where these regular investing tools come in handy.
Understanding SIP and STP facilities can help you in choosing between them alternately and even simultaneously to achieve financial goals. For best investing outcomes, interact with your financial advisor to know how to optimise your investments to suit your investment needs. But more importantly, be regular with investments as time and again it has been proven to work favourably in achieving long-term financial goals.
The illustration on power of compounding is for understanding and illustrative purpose only. Loads, taxes and other deductibles are not taken for calculation purposes. The material prepared is for investor education purpose and for general information only. This material is part of the investor education and awareness initiative of SBI Mutual Fund. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinion provided herein is based on the various parameters/inputs and there is no assurance or guarantee that the investment goals will be achieved. Investors are advised to refer to the Scheme Information of the respective Scheme and consult their financial, legal and tax advisers for planning of goals as well as before taking any decision of investment. Investors should deal only with registered Mutual Funds, details of which can be verified on the SEBI website (https://www.sebi.gov.in) under ‘Intermediaries/Market Infrastructure Institutions’. Please refer to the website of mutual funds for the process for completing one-time KYC (Know Your Customer) including process for change in address, phone number, bank details etc. Investors may lodge complaints on https://www.scores.gov.in against registered intermediaries if they are unsatisfied with their responses. SCORES facilitates you to lodge your complaint online with SEBI and subsequently view its status.
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An investor education and awareness initiative by SBI Mutual Fund