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SIP STP SWP & Trigger Facility in Mutual Funds

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SIP STP SWP & Trigger Facility in Mutual Funds

The mutual fund industry has, through the years, proved to be highly innovative in churning out a plethora of products. Consequently, the canvas of offerings has become crowded and the average investor is often confused about how best he could achieve his financial goals. Let’s look at four terms that are frequently used in discussions about mutual fund investments:

To begin with, here’s a snapshot of what these four terms mean.

Systematic Investment Plan (SIP)

SIP Mutual Fund
SIP Mutual Fund – Monthly Deposit

The objective of a SIP is to accumulate a amount over a period of time by making small but regular investments in units of a mutual fund.

Systematic Transfer Plan (STP)

STP Systematic Transfer Plan
STP – Transfer from one Plan to another

A Systematic Transfer Plan (STP) is a mechanism through which an investor transfers units from one scheme to another scheme of the same mutual fund house. We will see a little later why and when an investor would want to make such a transfer.

Systematic Withdrawal Plan (SWP)

SWP Systematic Withdrawal Plan
SWP – Convert Mutual fund units to bank balance

A Systematic Withdrawal Plan (SWP) is for conversion of mutual fund units into bank balance in a phased manner for a regular flow of income.

Trigger Facility

The investor defines a specific event, time or value, on the happening of which, the accumulated units are redeemed for cash or switched to another plan within the scheme or to another scheme but with the same fund house.

The Magic of Mutual Fund Investments

Compare FD and Mutual Fund
Compare FD and Mutual Fund Investments

Let’s take the case of Ramesh Manchanda. On January 1, 2008, Ramesh’s bank account was credited with an amount of Rs.12,00,000/- (12 Lakhs); his share from the sale of an ancestral property. Ramesh required the money for his personal use only from January 1, 2016. He could, therefore, have invested the amount in a Fixed Deposit with interest at 9% per annum for a period of 96 months (8 years) upto December 2015. The maturity value of his Fixed Deposit would have been Rs.22,33,155/- (22.3 Lakhs).

But, starting with the very same amount of Rs.12,00,000/-. Ramesh built an amount  of 36,56,391 (36.5 Lakhs). Isn’t that amazing? That’s the magic of investing in mutual funds

The Beginning

To start with, Ramesh decided that he should invest the money through a SIP with an equity fund. But, where would be hold the funds until the time that they were deployed in the equity fund?  His options were a fixed deposit scheme with a bank or a debt scheme of a mutual fund. Ramesh chose the debt fund. Why? Here’s the answer.

Year Fixed Deposit (interest at 9% per annum) Debt Fund (return of 7.15%)
Sum on 1 Jan Sum on 31 Dec Sum on 1 Jan Sum on 31 Dec
First 1200000 1274628 1200000 1285800
Second 1274628 1353897 1285800 1377735
Third 1353897 1438096 1377735 1476243
Fourth 1438096 1527531 1476243 1581794
Fifth 1527531 1622528 1581794 1694892

Observation

  • 2nd-upload-268_3832279_resizeInterest on deposits is subject to deduction of tax at source from the first year whereas tax on earning in a debt fund is payable only at redemption. That accounts for the higher year ending balance in debt fund in the first year itself even though the debt fund return is lower than the fixed deposit interest rate;
  • The benefit of indexation is available at the time of redemption of the investment in a debt fund. Owing to indexation benefit, Ramesh paid no tax on earnings in the debt fund whereas interest on fixed deposit would have been subject to tax at 30%

Ramesh went ahead and invested the amount of Rs.12.00 lakh in a Debt Fund on January 1, 2008.

STP from Debt Fund to Equity Fund

The Asset Management Company (AMC) was given a mandate to transfer Rs.20,000/- on the 7th of every month from the Debt Fund to the Equity Fund for a period of 60 months commencing from 7th January 2008 upto 7th December 2012.  Let’s have a look at the results of Ramesh’s decision.

Debt Fund

Amount (Rs.) transferred Balance units in account Market Value (Rs.) of balance units on December 31, 2012 Return (%)
12,00,000 14,706.06 2,57,564.81 7.15

Observations

  • units worth Rs.12.00 lakh have been purchased in the Equity Fund and Ramesh still has a balance of accumulated units in the Debt Fund having a market value of Rs.2,57,564 (Rs. 2.57 Lakhs) which his profit.

Equity Fund

Amount (Rs.) invested Units accumulated in account Market Value (Rs.) of accumulated units on December 31, 2012 Returns (%)
12,00,000 22,326 23,74,210 27.83

Observations

  • Ramesh’s investment of Rs.12.00 lakh through SIP over a period of 5 years is worth Rs.23,74,210 (Rs. 23.74 Lakhs) on December 31, 2012.

STP from Equity Fund to Balanced Fund

Ramesh knew that he would require the funds to be available for his use from January 1, 2016. Therefore, he had issued a date linked trigger to the AMC to transfer the balance in his Equity Fund to a Balanced Fund. The date trigger was set for January 1, 2013. The instruction was to complete the transfer in monthly instalments each of Rs.1.00 lakh. Beside the value of Rs.23.74 lakh in his equity fund, Ramesh also decided to plough in his profit of Rs.2.58 lakh from his debt fund investment. The final amount of Rs. 27,52,642 (Rs. 27.5 Lakhs) transferred and invested in the Balanced Fund also included a sum of Rs.1,20,867 (Rs. 1.20 Lakhs) that represents further earnings in the Equity Fund during the 2 years period of transfer.

Now for the results.

After the transfer of units, there was no balance of units in the Equity Fund (all units having been transferred to the Balanced Fund). The position in the Balanced Fund was:

Amount (Rs.) Invested Number of units accumulated Market Value (Rs.) of units on December 31, 2015 Return (%)
27,52,642.96 1,39,185.05 36,56,391.30 16.04

The Miracle

  • Ramesh began with a corpus of Rs.12.00 lakh on January 1, 2008 but, at the end of 8 years on December 31,2015, without doing anything spectacular, that amount had swelled to Rs.36.56 lakh;
  • The Compound Annual Growth Rate works out to 14.94%

Rationale for STP from Equity Fund to Balanced Fund

Investors should keep track of their financial goals, time frame and, at a reasonable time before the funds are required, take steps to protect their investments. If the corpus built is really substantial, this measure could be introduced even 3 years ahead of the goal date (Ramesh started more than 3 years ahead). The Balanced Fund return of 16.04% was much lower than the return of 27.83% from the Equity Fund. But, at such times, the focus must be more on investment protection and less on return. No investor should take the risk of his accumulated wealth going up in smoke because of untimely market volatility.

SWP from Balanced Fund to Bank Account

On January 1, 2016, the trigger Ramesh had lodged with the AMC came into force and the fund house started redemption of units from the Balanced Fund for credit to the bank account designated by Ramesh.

Tips

mutual fund helpful tipsSwitches between funds – Debt, Equity and Balanced

  • The STP route can be used for transferring funds from the source fund to more than one other fund provided all the funds are managed by the same fund house;
  • Decide the target funds first and make sure that the fund house permits switches from the proposed source fund to the target funds;
  • Keep the number of transactions from debt fund to equity fund as low as possible so that the funds start earning higher returns sooner;
  • If the fund house does not have an appropriate target scheme for a STP, the investor could choose to implement a SWP. The redeemed units could then be transferred through SIP to the mutual fund of his choice (instead of travelling directly from scheme to scheme, the investment would be routed through a bank account;
  • Use the STP route only if a sizeable amount is to be temporarily invested in a debt fund for subsequent transfer to an equity fund. Otherwise, the incidence of tax and exit load may render it a less than attractive proposition

Good for Investors to Know

  • With a STP, the investor exits from one plan/scheme and invests in another. Capital gains tax would be attracted for units redeemed from a debt fund;
  • Debt funds are eligible for indexation benefits. Thus, tax incidence, if any, may not be significant;
  • Equity mutual funds are tax free after 1 year of investment.
  • Exit load would be applicable if the units purchased have not been held for more than 1 year.

A Smooth Route

The SIP in equity mutual fund followed by STP to a balanced fund and, thereafter, SWP for a regular flow of monthly income route along with judicious use of the trigger facility should be integrated by investors for their benefit. The path would be:

STP from debt fund (if beginning with a lump sum amount) SIP in equity fund STP from equity fund SIP in balanced fund SWP to bank account

The route used by Ramesh was:

  • STP from ICICI Prudential Corporate Bond Fund – Growth Option (Debt Fund)
  • SIP in ICICI Prudential FMCG Fund – Growth Option (Equity Fund)
  • STP from ICICI Prudential FMCG Fund – Growth Option (Equity Fund)
  • SIP in ICICI Prudential Balanced Advantage Fund – Growth Option (Balanced Fund)
  • SWP to Savings Bank Account

Conclusion

The SIP, STP and SWP structures complement one another and that should be exploited by investors to achieve their goals. For a heady cocktail of rewarding returns, risk mitigation, automated financial planning and management of financial goals, put the combination of SIP + STP + SWP + Triggers to work for you.

(This article provides general advice and recommendations and does not constitute personal advice. While the calculations are accurate for the period to which they refer, the opinions and examples in this article are for informational and educational purposes only. I have never invested in any of the funds named in this article. The statements in this article should not be construed as advice to invest in the funds named. Mutual fund investments are subject to market risks. Investors are advised to perform personal due diligence before investment. Ramesh Manchanda is a fictional person. Any resemblance to any person, living or dead, is purely coincidental)

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Randolph Rowe is a professional banker and former General Manager of Small Industries Development Bank of India (SIDBI). He brings with him the wealth of 34 years of all-round experience in the banking sector - comprising 12 years with IDBI and 22 years with SIDBI - which he combines with his flair for writing.

1 COMMENT

  1. This is a very useful blog. These tricks and will encourage a lot of beginners to try a hand on stocks. I never knew that these types of tips will be revealed by experts. The points quoted above could be understood easily as it was explanatory with tabular data. This is a very clear blog that can be use as a reference. Nice write author!

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