Mutual funds are among one of the most popular investment vehicles and mobilize huge sums of moneys from investors who invest in equity, debt or a combination of both in line with their investment objectives.
While almost all of us are aware of the benefits of mutual funds and are most likely to have invested in a few either as a lumpsum or through the popular systematic investment plan (SIP), choosing the cumulative or dividend payout options; there are a few other lesser known investment and payout options also available.
Systematic Withdrawal Plan (SWP)
Just as an SIP ensures that the investors do not buy all their units at a market peak through rupee cost averaging (See article “Understanding the rupee averaging concept” dt. 27th March 2012), an SWP ensures that all the units are not redeemed at a market trough through an option of a redemption of a constant amount regularly. For eg. – An investor can opt for a monthly SWP of Rs 1000/- , which means units worth Rs 1000/- based on the prevailing NAV will get redeemed from his MF scheme on the scheduled date every month. Another advantage of SWP is that also provides regular liquidity to meet expenses and is a way of encashing profits regularly for profitable schemes.
Systematic Transfer Plan (STP)
In an STP, the specified amount is withdrawn periodically from one scheme (the source scheme) and invested in another scheme (the target scheme) of the same mutual fund house. It is like a SWP from one scheme and an SIP into another. STP has three variants.
Fixed STP or FSTP– A fixed amount is transferred regularly.
Capital appreciation Transfer Plan or CaSTP– Only the capital appreciation of the source scheme is transferred to the target scheme periodically.
Dividend Transfer Plan or DTP – The dividend payouts from the source scheme are transferred to the target scheme.
STPs can be used for preserving the profits by transferring the appreciation from an equity scheme to a debt scheme regularly and for capital preservation with income enhancement by transferring the appreciation from a debt scheme to an equity scheme regularly.
Investors in equity schemes of mutual funds sometimes lose out on taking advantage of a sudden fall in the stock market index and investing at a lower NAV or exiting at a higher NAV just because they were unable to execute the purchase/sale transaction on time.
A few mutual fund schemes offer the trigger option to address this problem. Using the trigger option, an investor can specify the amount of purchase or sale to be made if the market reaches a specific low or high level.