SWP (Systematic Withdrawal Plan)

SWP is a facility offered by mutual funds to enable the investors to redeem the units in small portions at regular intervals so that short term goals or monthly income needs are met. The intervals period can range from monthly or quarterly. SWPs are preferred choice by retired individuals as it can help in creating regular flow of income from their investment corpus in mutual funds. Other investors can opt for this to pay EMIs, pay bills, & to take care of other expenses.

SWP can be effectively used to make better use of surplus funds as it allows you to invest that amount in mutual fund schemes & facilitates withdrawal as per your requirement. It also offers capital protection as returns on arbitrage funds are risk-free.

Benefits
Tax Advantage:

When one withdraws through SWP, the amount doesn’t attract any tax. All the money withdrawn will be capital itself.

Fixed Income:

This facility is a good choice for those who are looking for regular income over a period of time.

STP (Systematic Transfer Plan)

STP is a way through which one invests a lumpsum amount in one scheme & regularly transfers a pre-defined amount into another scheme of the same mutual fund house. In the long run, STP helps in cutting down risks to a considerable level & earning good returns. Basically, STP means transferring an investment from one asset or asset type into another asset or asset type. This transfer process happens gradually over a period of time.

Further, STP can be classified into three parts

Fixed STP – Here the investors take out a fixed sum from one investment to the another.

Capital Appreciation STP – Here the investors take out the profit part of the investment & invest it in another.

Flexi STP – Here, the investor has a choice to transfer a variable amount towards the investment.

Benefits

Helps in Re-balancing Portfolio:

Offering a hassle-free mode for investing, one can directly get the SIP amount deducted from one’s bank account via a standing instruction to facilitate auto-debit function.

Consistent Returns:

Through STP one can transfer the set amount to a target equity fund while still being invested in a debt or liquid fund. So, an investor stands to gain benefit from the returns of the equity fund to which the funds are being transferred to & at the same time remain protected as a part of the investment remains in debt.

Averaging of Cost:

STP helps in averaging out the cost as it assists in buying units when the rates are lower & vice versa.

What Is ELSS?

ELSS OR Equity Linked Savings Scheme, as the name suggests, is an equity based mutual fund. Through ELSS, one can invest in tax saving mutual funds & avail tax deductions under Section 80C. There are many advantages to investing via ELSS like:

Your principal amount gets multiplied due to the POWER OF COMPOUNDING

Substantially HIGHER RETURN

Minimum lock in period of 3 YEARS

ELSS is an equity diversified fund & investors enjoy both the benefits of capital appreciation as well as tax benefits. But for long term, ELSS generate better returns though with slightly higher risk.

Benefits of ELSS

Advantages one can achieve by investing in ELSS

Equity’s Potential in Getting Return:

Equities are known for giving potentially higher long-term gains compared to other tax saving instruments available in the market. So, with ELSS, one can more effectively & efficiently construct a portfolio keeping in mind the long-term perspective.

Outperforming Funds:

If you want to save money & earn higher return of approximately 15 percent & more, ELSS funds are the way to go.

Financial Goal Planning:

With inflation beating returns, ELSS funds are the best when it comes to long term financial planning. Under the guidance of an expert financial advisor, one can easily achieve the set goals of buying their dream home, children’s education, wedding, car & much more.

Less Lock in Duration:

ELSS funds have a 3-year lock in period, which is less as compared to other investment avenues like PPF, FDs, NSC.

Investment Option:

One has an option of either investing in one go I.e. lumpsum amount or can opt for SIP. SIP or Systematic Investment Planning is where a certain amount gets deducted from your account on a monthly basis.

Debt Mutual Funds Vs Fixed Deposits

Currently, there are two most popular methods of investing – Fixed Deposits & Debt Mutual Funds. These two methods of investment are normally do meet primary goals of an investor which are low risk investment avenue, seek returns in 5 years & to gain atleast 8% to 9% of rate of returns. But then there are certain aspects like benefits, features that differentiate them & the difference in the way they work can be of advantage or disadvantage depending on the type of investor one is.

Fixed Deposits

Fixed Deposits are most popular investments for most investors. The key features that make them popular is safety, Liquidity (you can withdraw the amount by paying a small penalty anytime before maturity) and the returns are known in advance as Fixed Deposits indicate the rate of interest that any investor will earn. The interest income that you earn from Fixed Deposits gets added to your total income and hence the tax rate that is applicable depends on your total income. If you are in the highest tax bracket then you will be paying a tax rate of 30% plus applicable surcharges. Most investors are also subject to Tax Deduction at Source (TDS) on the interest payments.

Mutual Funds

Debt Funds / Liquid Funds are categories of mutual funds that invest 100% of the underlying investments in debt securities. In other words, these funds do not take any exposure to the equity markets. Hence these funds are relatively less volatile than the equity funds.

Debt Funds / Liquid Funds carry risks that are inherent to debt securities viz. Credit Risk, Interest Rate Risk and Liquidity Risks.

Unlike a Fixed Deposit, open-ended debt mutual funds do not carry any maturity date and hence the investors have the flexibility to withdraw anytime that they need the money.

Investors can also opt for the Systematic Withdrawal Plan (SWP) if they wish to need to withdraw money for their regular needs.

Once the investor redeems (withdraws) from the debt/liquid funds scheme, the gains that accrue are taxed as Short Term Capital Gains (holding period of below 3 years) / Long Term Capital Gains (holding period greater than 3 years). This can be advantageous for investors in the highest tax bracket.

Debt Mutual Funds    

Return is market dependent hence may vary as per the prevailing conditions    

There is a scope for capital gain & loss    

Tax liability only arises when the investor sells the units of the mutual fund    

There is no concept of premature withdrawal    

Are more tax efficient if the investment horizon is for more than 3 years    

Can liquefy investments quickly

Bank Fixed Deposits

Returns are fixed & not subject to any market fluctuations

In FDs, there is no scope for capital gain or loss

These attract higher tax rate. Tax is also applicable on accrued income which is due to be received    

Penalty is levied on premature withdrawal

Interest income is taxed. If the interest paid exceeds Rs. 10,000

Funds are locked in until maturity date

Equity Funds:

These are type of funds that primarily invest in stocks and main investment objective of this class of funds is long term capital growth. Further, there are many types of equity funds which are categorized based on the size of the companies like large, medium or small.

Debt Funds:

These funds are known as safe investments and provide fixed returns. In these, funds are invested in debt instruments like company bonds, government bonds, fixed income assets.

Balanced Funds:

The strategy used by these funds are to maintain a certain percentage of mix of both fixed income & equities. Normally, a typical balanced fund will maintain a distribution of 60% equity & 40% fixed income. A similar type of fund known as “Asset Allocation Fund” follows on similar objectives that of Balanced Funds but then these kinds of funds do not hold any specified percentage of any asset class.

Dividend Fund:

This type of mutual funds invests in stock of companies that pay dividends, which are profits that a company shares with its stakeholders. These are income generating funds & tend to be less risky than other types of funds. It is a good choice of investment for those who seek regular payments over appreciation.