There are two ways of investing in Mutual funds:
- Lump sum Investment
- SIP (Systematic Investment Plan)
Above two methods are used by most of new investors. If you do not have big amount of money in your hand, you must opt for SIP where you can start monthly investment as low as Rs.500. whereas if you already have money at your disposal, you can invest as lump sum. In lump sum investment you will start getting profit/loss on whole amount from day one. Whereas in SIP, as your initial investment will be very small, thus, you will gain very small or insignificant return till you accumulate big amount after several months.
Talking about advantage of SIP, SIP average out the risk of share market as you keep investing regularly.
Both SIP and lump sum has their own advantages. Is there any method by which you can take advantage of both the world?
Answer is yes, and this is the reason why I am writing this blog. This method is called STP-Systematic transfer plan. Suppose you have a lump-sum amount and you want to reduce risk by investing through SIP. In this case STP is best solution.
First you choose two funds from same company. Invest your full amount in first fund which has zero exit loads. Using fixed monthly withdrawal through STP option you can invest in second fund as SIP. In this way, you will be able to earn return on both the mutual funds.
Suppose I am having two mutual fund schemes from Aditya Birla mutual fund namely:
- Aditya Birla Sun Life Low Duration – Direct – Growth
- Aditya Birla Tax relief 96
First fund has zero exit load, so I will park my lumpsum in first fund and I will opt from STP which I will use as SIP for second fund. In this way I will earn return on both the funds.
1) Names of mutual funds mentioned are only for example and are not any recommendation to buy or sell.
2) Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing