Today mutual funds have become a major means of wealth creation. As the markets are maturing mutual fund investing has also become equally proactive and strategic. SIP (Systematic Investment Plan) and STP (Systematic Transfer Plan) are two important methods or tools with proper information of which you can strategize your mutual fund investing. You will know in today’s FinDose with MarketShala what should be the mutual fund investing strategy in Indian and USA market. Let’s start.
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Mutual Fund Investing and Wealth Creation History
Mutual Fund Investing Growth in India
Indian investors have generated enormous wealth in the last 20 years through mutual funds. For example, if someone had invested ₹10,000 in HDFC Equity Fund in 1995, its value today would have been more than 24 lakh with a CAGR of 17%. And all this is the result of compounding the gains and staying invested in the Indian markets by believing in Indian economic growth.
Role of Mutual Funds in the U.S. Market
U.S. Investors have also been able to build substantial wealth through mutual funds, like the Vanguard 500 Index Fund consistently generating substantial returns for investors. Vanguard 500 Index Fund consistently delivering 10-12% annualized returns. Such funds also work well for retirement planning, particularly where accounts like 401(k) play a key role.
This type of historical data demonstrates how significant wealth can be built through mutual funds through a disciplined approach and long-term investing, particularly in emerging markets like India.
What is current trend and why Mutual Funds are so popular
1. In India:
o Mutual fund’s AUM (Assets Under Management) has now reached ₹67.26 trillion (till October 2024). This figure is increasing every quarter. o Monthly SIP contributions have recorded an all-time high of ₹23000 crore per month, a large contribution coming from retail investors and increasing incrementally. This shows how confident retailers are about stock market related investing.
2. In U.S.:
o U.S. is a developed country and even there more than 52% of households invest in mutual funds. This is one such indication which also works to strengthen the confidence of investors of emerging market based countries towards Mutual Fund investing.
o In today’s market the trend of actively managed ETFs and mutual funds is increasing. The lack of knowledge of investors about the stocks is now not keeping them away from investing. Fund managers of well knowledgeable wealth management companies are giving competitive returns to the investors. Portfolio diversification can also be easily achieved through them.
This idea is clearly reflected from the latest and historical data that mutual funds have become a preferred investment vehicle worldwide and easy to adopt.
SIP (Systematic Investment Plan) – Journey from small amount to big wealth
SIP strategy has proved to be a boon for investors. Wealth management companies are also playing a big role in this, which has made possible the wealth creation to even a small investor, even if he is not able to invest more than Rs. 500 per month. In SIP, you keep investing a fixed amount in a particular mutual fund every month and this becomes an excellent way to play the market volatility. In this way, the investor gets an opportunity to invest at a good average price.
Benefits of SIP
• Wealth Creation: In this systematic way, for an example, if you do SIP of just ₹5,000 monthly and your fund grows at an annual growth of 12%, then in 20 years your amount will become more than ₹50 lakh, that is, 1000 times, this is the miracle of compounding and yes, 12% is the very minimum expectation what we can have from the stock markets in the long term.
• Reduces the effect of market volatility: Due to SIP automation, the emotional impact of the investor is not affected on his investment, which saves the investor from impulsive decision making.
• Tax Benefits: You can also avail tax benefits by investing in mutual funds in India. You get tax benefits under section 80C by investing in ELSS category mutual funds.
What should be the SIP Strategy?
• If your investment horizon is long term i.e. minimum 3 years and more, achieving long term wealth creation goals becomes easy by doing SIP in diversified equity funds. In this way, you can start planning today for your retirement plan and future expenses for children’s education.
• The SIP amount we decide today is as per today’s income, after a year when your income increases, you should also increase the SIP amount in the same proportion so that your wealth creation journey gets exponential growth.
STP is a smart way to invest lumpsum amount
• Risk Mitigation: Due to gradual transition of funds, the risk of market volatility is reduced.
• Best utilization of idle money: Your lump sum fund is first parked in debt fund where your funds get approximately 6 to 7 percent yearly return. Then your funds are automated from debt fund to any equity fund through STP which works to meet your expectations of future investment returns. This is a great way to put your idle money to work.
• Flexible transition: Through STP, you can customize your money transfer frequency—monthly, weekly, or daily. This flexibility helps you to systematically strategize your investments.
STP Strategy
• You can use STP for short-to-medium-term investing goals. Instead of investing your lump sum fund in a mutual fund at one go, park it in a debt fund first and then systematically transfer the same fund to an equity fund over a period of 2-3 years to get better results on your investment.
• You can create a well-balanced portfolio by combining STP with SIPs.
SIP vs STP: Which is best for You?
1. Regular Income Waale: If you have a regular monthly income source or you are a salaried person then SIP is the best tool for you to invest.
2. Lumpsum Investors: If you have lump sum money, then instead of investing it in an equity mutual fund at one go, it is better to park it in a debt fund and then slowly and systematically move it to a diversified equity fund through STP over 1 – 3 years.
3. Mixed Approach: Another way is to use STP process to achieve medium term (2-3 years) financial goals and invest through SIP for long term goals.
Investing Ideas: What is Better in India and U.S. Markets?
• India:
o SIP funds like Axis Bluechip Fund, Motilal Oswal Large and Midcap Fund and Mirae Asset Large Cap Fund are perfect for beginners. o For STP, first invest in liquid funds and then transfer to SBI Small Cap Fund to generate better returns.
• U.S.:
o S&P 500 Index Funds for SIP are a good option for retirement planning kindly of financial goals. o STP can be used in taxable accounts by moving from money market funds to high-growth mutual funds.
Final Verdict: Who will win in SIP vs STP?
STP vs SIP, it is not a battle but two principles through which the battle of wealth creation can be won very easily. It depends on the situation of you and your funds, accordingly you can create a deadly combination of portfolio by using both SIP and STP tools.
The funds which are coming to you regularly monthly, you should invest them through SIP and the funds which you have in lump sum, instead of investing them in volatile equity funds at one go, invest them through STP strategy so that you will be able to maximize your returns.
Give your investments time to grow rather than imposing time restrictions, pursue your SIPs and STPs with discipline and let the world’s true wonder of compounding show its magic. Creating wealth is easy but doing easy things is difficult for most of the people and you are not one of them.
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FAQ:
1. What is the difference between SIP and STP?
o SIP is a regular investment of a fixed amount, which you can do through a mutual fund scheme, usually its frequency is monthly or weekly. In STP, you systematically transfer money from one mutual fund scheme (usually debt fund) to another mutual fund scheme (usually equity fund) so that you keep getting interest income even when your money is idle.
2. Which is better: SIP or STP?
o This depends on your financial situation and goals. If you have a regular monthly income, then SIP is better. If you have a lump sum amount which you want to invest systematically, then STP is better.
3. What are the benefits of SIP?
o There is the advantage of averaging the buying cost.
o Emotionless discipline is maintained.
o It helps in long-term wealth creation. o SIP in ELSS funds is useful for tax-saving.
4. How does STP work and what are its benefits?
o Systematic Transfer Plan (STP) refers to the method of transferring a fixed amount of money at regular intervals from one mutual fund to another.
o The risk due to market timing is reduced.
o There is better utilization of lumpsum money.
o It is flexible—you can transfer it monthly, weekly or daily.
5. How can SIP and STP be used in Indian and U.S. markets?
o India: As an example, SIP is popular in Axis Bluechip Fund or SBI Small Cap Fund. STP is also common from liquid funds to equity funds.
o U.S.: As an example SIP is common in S&P 500 Index Funds and STP is common in money market funds to equity funds.
6. How can SIP and STP be used together?
-You can create a balanced portfolio by combining both strategies. Example:
o Invest in equity funds through SIP for long-term investing.
o Use STP to make a gradual transfer from debt funds to equity funds to achieve medium-term goals.
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