It is common knowledge that a systematic investment plan (SIP) is a good way to invest in mutual funds. There are, however, other useful strategies for investing in mutual funds which help in minimising the risks of bad timing.
Pulling out
Just like an SIP prevents you from jumping into markets at one go, a systematic withdrawal plan (SWP) ensures that you don’t pull out of it suddenly either. An SWP is the reverse of an SIP - you withdraw certain amounts at regular intervals from your fund. This withdrawing can be monthly, quarterly or half-yearly. Withdrawing means that units held in the fund will be redeemed.
An SWP makes sense when you have built up a sufficient corpus and you are in need of regular cash flows. It ensures that only the amount you need is taken out, with your remaining investment continuing to generate returns and grow.
There are two options in SWPs. One is to take out a fixed sum every month/quarter. This option is useful when you’ve retired and require steady cash flows. The second option is to withdraw only the amount by which your capital has grown, which means that the cash flows fluctuate depending on market conditions and how the fund has done. But it ensures that your initial capital always stays invested.
All fund houses offer systematic withdrawals. But they build in conditions on the funds which qualify for SWPs, the minimum number and amount of withdrawals. Franklin Templeton, for instance, asks for a minimum balance of Rs 25,000 to start an SWP. Under the fixed option, the minimum withdrawal should be at least Rs 1,000. For funds from the Reliance stable, it is at Rs 500. Birla Sun Life offers the SWP scheme only for its debt funds.
You also aren’t usually allowed to run an SIP and an SWP in the same scheme. Also note that exit loads apply.
systematic transfer plan
But what if you want to systematically rebalance your investments? Enter a systematic transfer plan. In an STP, a certain amount is transferred from one fund into another at regular intervals. Like an SWP, either a fixed sum or gains on a fund can be transferred. Periodicity can be daily, weekly, monthly or quarterly, depending on the fund house.
You can use this tool, for example, to start with investing in safer options such as debt funds and then setting up an STP to periodically buy into equity funds. .
An STP can also be used to transfer gains on an equity fund into a debt fund to ‘protect’ gains. A dividend transfer plan, offered by houses such as Reliance, allows you to transfer dividends earned on a fund into another.
However, some fund houses, such as ICICI Prudential, allow transfers only into equity or hybrid funds from income or money market funds and not the other way round. Most fund houses specify the schemes available to transfer from and transfer into. Exit loads are applicable while transferring out of a fund too. Minimum amounts to be held in a fund to start transferring and that allowed to be transferred are also specified.
Averaging value
Some fund houses, such as HDFC and ICICI Prudential, allow a variation of the STP, under which the amount transferred into a fund depends on how its value has moved. In this, you set a minimum amount. In the months after the first transfer, the amount which is moved into the destination fund changes in the following manner.
First, the set amount is multiplied by the number of months completed thus far in the STP. Then, the market value of the investment already done is taken. If the difference between these two amounts is greater than the set amount, then that is invested. If not, the set amount is invested.
Simply put, what you’re doing here is investing more when markets are down, allowing for lower average costs and hence overall better returns over the long term.
In fact, the concept of investing more during downswings is applicable to SIPs as well, called value averaging plans. Instead of investing a fixed amount every month as with an SIP, you set a target return (and thus value) for the fund. If, in a month, the fund’s value drops, you invest more to bring the value of the investment to meet the set target. If the returns beat the target, you invest a minimum amount or even redeem units to bring the value back down to target.
However, this is not available as a tool by fund houses, though some distributors may offer it. You can make your own calculations and execute a value-averaging plan, but this calls for a good bit of effort on your part.