How do Systematic Investment and Systematic Withdrawal Plans Work

These days, if you wish to earn any extra cash outside of your office job, it is a given that you will think of investing in various mutual fund schemes. Mutual funds are one of the best ways to keep your money safe even while getting profits, known as dividends, from investing that money. By investing as low as 500 bucks per month, you can gain profits from it.

But what exactly is a mutual fund?

A mutual fund is a rather large amount of money that is pooled together through investments from different investors and is then used to buy securities like bonds and equities. These securities go on to make profits that are then divided among the original investors depending on how much money they had invested. Different mutual fund schemes work in different ways but one of the popular ones out there is the Systematic Investment Plan.

How to invest in SIP

The Systematic investment plan, or SIP, lets you invest small amounts of money after particular periods of time. So, instead of having to invest a rather large lump sum of money at one go, you can divide it into smaller parts and invest over time. You can start small with SIP investment. A lot of people will invest as little as 500 bucks per month under this particular investment plan. You fix a particular amount to invest and this same amount is deducted from your bank account every month, week or quarter. The money is then used for investing in the mutual fund scheme that you like. The systematic investment plans bring you rather large returns because of the compound interest factoring into the dividend calculation. For people looking for consistent monthly payouts, there is a scheme similar to the systematic investment plan. It is known as the systematic withdrawal plan.

What is the Systematic Withdrawal Plan?A lot of people, when they invest in different mutual funds, look for options with which they are ensured a monthly income of sorts. So, many debt-oriented and a few other schemes give one the option to go for the quarterly or monthly collection of dividend. But while all that is true, it is also true that since dividends made depend on the performance of the purchased securities, the payments are not always consistent. Sometimes your purchased securities may perform better or worse and the dividends you earn (or don’t) depend on that. So, if you are actually looking for some consistent monthly income, it is better to go for something like the SWP or the Systematic Withdrawal Plan. The SWP allows you to invest in a scheme while specifying a particular amount of monthly payout. So, if you wish to take out Rs 5000 each month, the amount of units whose value equals Rs 5000 will be taken out of the fund and the payment will be made.

In the end, it is important for the investor to know what their ultimate goal is. If they are looking for monthly investment or payment, the systematic plans are the best fit. Of course, there are several other mutual fund schemes out there designed specifically to suit your long term needs too so you should research and invest accordingly.

Here's a little bit about myself. I've done a Masters in Economics and teach the subject to high school students. I am 32 years old and married to an investment advisor. A Dhoni fan who loves to play football! I am a sports enthusiast and a firm beli