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Much More than just an SIP in Mutual fund investing

If you are a mutual fund investor, you need no further explanation on what an SIP is. Every fund house aggressively preaches the benefits of systematic investment to whoever gives an ear. Its not-so-common sibling is the STP. But if you thought that this was all there was to fund investing, other than the invest-at-one-go style, which we caution against, by the way, it's time for an update.

 

Fund houses have donned their creative hats and structured innovative ways to supplement the conventional SIP. Here's what is available in the market.

 

Systematic Investment Plan (SIP)


It's easy, it's convenient and it works for the investor. In a systematic investment plan (SIP), a fixed amount is invested in a fund at a predetermined date, which could be either monthly or quarterly. Not too long ago, daily SIPs were also introduced.

 

Systematic Transfer Plan (STP)


A systematic transfer plan (STP) is a combination of a systematic withdrawal plan (SWP) and SIP. Under a STP, a pre-determined amount is redeemed every month from the fund at regular intervals. For instance, the fund house withdraws a fixed amount at a pre-determined frequency from either a debt or liquid fund, where the investor has invested his/her initial corpus, and channelizes the investment into another fund chosen by the investor. Generally there are two asset classes at work. The initial corpus could rest with a debt or liquid fund and periodically money may be transferred to an equity fund.

 

Dividend Transfer Plan (DTP)


The dividend transfer plan (DTP) resembles the dividend reinvestment plan (DRIP). The dividends that an investor earns in a scheme, gets reinvested in another scheme from the same fund house. Not the same scheme (like dividend reinvestment), just the same fund house. An investor can essentially structure his investments in such a way that dividends from, say, his debt fund get reinvested in an equity fund of his choice.

 

Value Investment Plan (VIP)


The value investment plan (VIP) was introduced by Benchmark Mutual Fund. Before investment is initiated, a target rate of return that has to be achieved monthly is decided. After the first installment, subsequent investments made are based on a formula, which is that the amount invested will be the difference between the target and actual value of investment (see illustration).
 

So if the market movements are below the desired rate of return, subsequent investment rises to make up the short fall. Benchmark Mutual Fund also has value transfer plan (VTP), where the same strategy is implemented by withdrawing from a debt fund and re-investing the proceeds in an equity fund.

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