Once you have understood your risk preference and finalized the schemes where you want to invest your money, it is important to understand the various modes of investing in mutual funds. In their endeavor to make investments simple and convenient, fund houses offer various modes of investment like:
These plans are designed to help you find the mode of investment that best suits your income and investment goals. Let’s look at each of them in detail:
Let’s say that you have managed to accumulate a corpus of funds and are now looking at avenues to invest and earn returns. Or you are a working professional and have been awarded a good bonus this year and want to invest it rather than spend it on an extravagant vacation or an expensive gadget. You start looking at investment options and decide that mutual funds offer a good range of schemes to choose from. You analyze your risk preference, define your investment objective and start assessing individual schemes. Once you finalize the kind of schemes you want to invest in, you are faced with the question of whether you want to invest the entire corpus together or not.
A lump sum investment has its own set of pros and cons. While it creates a possibility of high returns if your timing of purchase is right, it can also exposure your investments to high risks (if you get the timing wrong). To hedge against this, it is important for lump sum investors to have a longer time horizon of investments and invest in schemes that have a steady record.
This is option is perfect for the people having a regular monthly income – the majority population of our country – the working class. If you don’t have any savings but want to start creating wealth for your future expenses, then an SIP is a boon for you. You can start saving from as low as ₹500 a month if you choose the SIP mode of investing in Mutual funds.
This works similar to a recurring deposit where you deposit a fixed amount every month which gets added to your cumulative capital and earns compound interest. In the SIP mode of investment, units are purchased based on the NAV (Net Asset Value) of the scheme on the day of depositing the instalment. This helps you benefit from Rupee cost averaging since your funds are invested in the same scheme at different levels of the market. So when the markets are high, the number of units purchased are lesser as compared to the times when the markets are low.
If you have a corpus of funds but don’t want to invest in lump sum and neither as an SIP, then a Systematic Transfer Plan (STP) is designed just for you! An STP can help you invest in equities gradually by initially investing your funds in less risky options and systematically transferring funds from this scheme to a high return scheme (like equity) from the same fund house. They utilize the benefits of investing lump sum without the additional risks by exposing your corpus to less risky funds and the benefits of SIP by transferring small amounts to high-return schemes. It is the best of both the worlds and if used prudently, can help you realize your financial objectives. Dividend Transfer Plan or DTP
Most investors are aware of a Dividend Reinvestment Plan (DRIP) where they no longer receive dividend payouts but the amount is reinvested into the scheme which had generated the dividend. A Dividend Transfer Plan (DTP) works similar to a DRIP but with a small change in structure.
In a DTP, the dividend can be reinvested in a scheme from a different asset class as compared to the scheme which generated the dividend. So, if you have received dividend income from a debt scheme, then you can ‘transfer’ it to an equity scheme and vice-versa. This works well for low risk investors who have invested in a debt fund. They can choose to transfer their dividends to an equity fund and create a possibility of earning high returns without exposing their capital to any risk.
As the name suggests, this is more of a withdrawal mode than an investment mode but we thought it was worth a mention because investment is all about managing your future needs and expenses.
Picture this – you work through your life saving money and investing it meticulously to create a good nest egg. AT retirement, you receive the pay-out as planned and have a good corpus in your bank account. But, you are not so good at managing expenses and end up spending on unnecessary things. This exposes you to the possibility of utilizing the entire corpus and being left with no savings / investments at an old age. Certainly not a pleasing thought.
“WISE SPENDING IS A PART OF WISE INVESTING AND IT IS NEVER TOO LATE TO START.”
A Systematic Withdrawal Plan (SWP) steps in right here and ensures that you live a financially healthy life post retirement and never run out of funds. Through this plan you pre-decide the amount of money you wish you withdraw monthly / quarterly to meet your regular expenses. The remaining investment continues to earn returns prolonging the longevity of your funds.
Investment is not a rocket science but needs a lot of thought to ensure that your financial dreams are met and your savings work as hard as you do to create a life you desire. Choose the mode of investment wisely and synergize with your savings.
In the long run, it’s not how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving and investing it.- Peter Lynch