Systematic transactions require investors to commit to a set of transactions in advance. The value of each investment, the periodicity of the transaction and the day of execution transaction will be decided at the time of commitment. The transaction will be executed at the applicable NAV at the time of execution of each transaction. Systematic transactions which have been initiated can be cancelled at any time by the investor after giving due notice.
Systematic Investment Plans (SIP)
In a systematic investment plan, investors commit to invest a fixed sum of money at regular intervals over a period of time in a mutual fund scheme. It enables investors to build a corpus over time even with small sums invested. Through SIP, investment is made at different prices over the term chosen and this allows investors to benefit from the volatility in the market. Since the same amount is being invested in each installment, investors buy more units when the price is low and less units when the price is high. Overtime, the average cost of acquisition per unit comes down. This is called rupee cost averaging and is the primary advantage that SIPs provides investors.
The above table shows the monthly investments made by an investor in mutual funds at different NAVs. The investor is able to reduce the average cost of acquisition per unit by just investing regularly, without having to adopt any market timing strategy. This is possible because the same sum of money invested buys more units when the NAV is low and less units when the NAV is high. This reduces the average cost of purchase of units for the investor. The investor is able to use market volatility to his advantage. This is the benefit of rupee cost averaging and SIPs.
An investor enrolling for an SIP has to make the following decisions:
- The scheme, plan and option: Mutual funds mention the schemes in which SIPs is allowed.
- The amount to be invested in each installment: The minimum investment for each installment will be specified by the mutual fund. This is usually lower than the minimum amount of investment for a lump sum investment.
- The periodicity of the investment: The intervals at which the investment can be made, say monthly or quarterly, is defined by the mutual fund. Investors can choose the periodicity that is most suitable.
- The date of investment each period: The investor has to choose the dates from those specified by the mutual fund.
- The tenor of the plan: The date of commencement of the SIP and the term over which the SIP will run has to be selected by the investor. The mutual fund usually specifies the minimum commitment period.
- The mode of payment: The payment mode for an SIP can be the following
- Post-dated cheques: Each cheque will bear the date of the installment and mentions the specified SIP amount. The set of cheques equalling the number of installments over the term of the in the SIP have to be handed over along with the SIP enrollment form.
- Electronic Clearing Service (ECS): ECS is an electronic payment method in which the investor instructs the bank to credit a beneficiary account with a fixed amount on specified date. The investor has to submit the bank account details of the beneficiary such as name, bank, branch, account number, MICR code of the destination bank branch, date on which credit is to be afforded to the beneficiaries and the amount. Investors fill up the ECS mandate form and submit it with their SIP application. ECS facility is available only in select cities as provided by the AMC.
- Standing Instructions (SI): SI is a payment option for an SIP if the investor and the mutual fund hold bank accounts with the same bank. The investor instructs the bank to credit the SIP instalment amount on each SIP date to the mutual fund’s account.
Electronic payment options require an instruction to be given to the bank that is signed by all the account holders. This form is part of the SIP enrolment form and registered by the mutual fund with the bank.
To start an SIP in an existing folio, the SIP enrollment form along with the post-dated cheques or instruction form for electronic payment has to be registered with mutual fund. If a fresh investment is being made in the scheme through the SIP, the first installment will be used to open the folio. The investor has to submit the application form duly filled along with the SIP enrollment form. The cheque for the first installment alone will bear the date on which the enrollment form is submitted. An SIP can also be initiated along with an investment in an NFO. The first installment will be the allotment in the NFO and the subsequent installment after the scheme reopens for continuous purchase. The amount of each installment of the SIP, whether in the NFO or subsequently, will be the same.
The SIP enrolment form will require the SIP commencement date, periodicity and tenor of the SIP, date selected, installment amount and details of payment to be provided. The enrolment form along with the payment mandate has to be submitted at the official points of acceptance.
Mutual funds specify a minimum period (typically 15 to 30 days) before the first installment for submitting the forms.
An SIP can be discontinued or cancelled by the investor giving notice of the same in writing to the mutual fund and to the bank, in case of electronic payment instructions. The mutual fund specifies the notice in days required before the next installment to process the cancellation. Dishonour of cheques and insufficient funds in the bank account of the investor are other ways in which an SIP is discontinued. If the payment for one or more installment does not go through, the mutual fund may cancel the SIP.
The mutual fund will notify the investor to renew an SIP in force when it is close to completion of its term. Investors can choose to renew it on different terms with respect to investment amount, frequency, term and payment mode.
Systematic Withdrawal Plan (SWP)
Investors can structure a regular payout from the balance held in a mutual fund investment by registering for a systematic withdrawal plan. An SWP enables recurring redemptions from a scheme over a period of time at the applicable NAV on the date of each redemption. It is a facility that provides a defined payout from a fund for investors who need it. Investors seeking to redeem units from a scheme can also use this facility to eliminate the price risk associated with redeeming all the required units at one point. In an SWP since the withdrawal happens at different points, the investor will be able to benefit from the NAV volatility in the period. When the NAV is high, fewer units are redeemed to payout the same amount of money and vice versa.
Investors can register for an SWP using the transaction slip. They need to specify the following to the mutual fund:
- Mutual fund scheme, plan & option.
- Amount to be redeemed: The mutual fund will specify the minimum amount that can be withdrawn in one installment.
- Frequency of withdrawal from the options provided by the mutual fund such as monthly, quarterly and so on.
- Date of redemption for each installment has to be selected from the options provided by the mutual fund.
- The period or tenor of the SWP over which the redemption will be done. The mutual fund may specify a minimum period for the SWP.
- Date of commencement of the SWP. Mutual funds specify a minimum period before the first redemption for the SWP request to be registered with them.
The SWP is redemption from a scheme. Exit loads will apply to each redemption transaction and there will be tax implications for the investor on redemption in the form of capital gains. The redemption amount will be credited to the investor’s bank account registered with the mutual fund. The SWP will cease automatically if the balance in the folio falls below a specified amount. Mutual funds may offer variations to the SWP such as the facility to withdraw only the appreciation in a folio in the period between one installment and the next. Investors can cancel an SWP by notifying the mutual fund of the same.
Systematic Transfer Plan (STP)
A systematic transfer plan combines redemption from one scheme and an investment to another scheme of the same mutual fund for a defined period of time. The scheme from which units are redeemed is called the source scheme and the scheme into which
investments are made is called the target scheme. For example, an investor who has been accumulating funds in an equity fund may decide to transfer it over a period of time to a less risky fund such as a short term debt fund as the time to use the corpus comes near. Instead if the units were redeemed at one point, there is a risk of the NAV being low at that point in time and the resultant fall in the value of the corpus. The folio under which the investment in the target scheme will be made will be the same folio from which the redemption is done from the source scheme.
The investor registers an STP with the mutual fund by specifying the following:
- Source and target scheme including plan and option. The schemes that are eligible for STP will be specified by the mutual fund.
- The amount to be redeemed and invested in each installment. The mutual fund will specify the minimum amount that can be transferred.
- The frequency of the STP has to be selected from the options provided by the mutual fund.
- The period over which the STP has to be conducted has to be specified. Mutual funds may fix a minimum period for the STP.
- The commence date for the STP has to be specified and due notice has to be given to the mutual fund before the commencement of the first transfer.
The redemption of units from the source scheme and the investment into the target scheme will happen at the applicable NAV in force. The redemption will attract exit loads and taxes as applicable.
Switch
A switch is a single transfer from one scheme or option of a scheme to another mutual fund scheme, or option of the same scheme. The investor redeems units from scheme and simultaneously invests it in another scheme of the same mutual fund in an inter-scheme switch. In an intra-scheme switch, the investor redeems from one option of a scheme and invests in another option of the same scheme. In a switch, an investor can transfer all or a portion of the funds held in the investment. The applicable NAV for the switch-out (redemption) from the source scheme or option and switch-in (purchase) into the target scheme or option will depend upon the type of schemes. Since there is a redemption that happens in a switch, exit loads and taxes will apply. The investor will need to specify the source and target schemes and options and the amount to be switched.
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