Understanding SIP, STP and SWP
In mutual fund investing, individuals come across different plans designed to help them manage their investments and achieve their financial goals. Three popular options are Systematic Investment Plans, Systematic Transfer Plans, and Systematic Withdrawal Plans. They sound similar, but each of these plans – SIP STP SWP has its own purpose. So let’s understand what these plans are and how they are different in detail.
What is SIP (Systematic Investment Plan)?
One can invest in mutual funds in two ways. Investors can either make a one-time, large investment called a lump sum investment, or they can choose to invest a fixed amount of money regularly through Systematic Investment Plans. Not only are SIPs affordable but they also offer many advantages like compounding interest, rupee cost averaging, flexibility, and instilling a habit of disciplined saving and investing in investors.
Every mutual fund scheme has an NAV (Net Asset Value), which is basically the price of one of its units. This NAV is updated daily based on the fund’s market performance. Every time you make a contribution to the fund, you are buying units at that day’s NAV price.
After you have set up your SIP, the money will get automatically deducted from the bank account you’ve linked on a predetermined date, and get invested into your chosen mutual fund.
One of the key benefits of SIPs is their flexibility. You can easily change the contribution amount or adjust the frequency of your investments as per your financial goals or situation. Should you face any financial emergencies, many SIPs offer the option to temporarily pause your contributions without completely cancelling the plan.
What is SWP (Systematic Withdrawal Plan)?
A Systematic Withdrawal Plan is like the opposite of an SIP. With SIP, you are putting a fixed amount regularly into a mutual fund of your choice. On the other hand, with SWP you are withdrawing a fixed amount regularly from your mutual fund investment. When you withdraw your money, you are actually redeeming the units of your mutual fund at the prevailing NAV.
This means the amount you receive depends on the current NAV on the day of withdrawal. You withdraw these instalments until your investment corpus is fully redeemed. With each withdrawal, the number of units in your mutual fund goes down till it reaches zero. But until then the remaining balance will continue to grow and generate returns based on the market performance of the fund.
SWPs are ideal for individuals who have already amassed a large corpus and are looking to receive a steady stream of income. These plans are generally preferred by retirees as they allow them to meet their financial needs without having to liquidate their entire investment at once. Just like SIPs let you decide how much you want to invest and how often (weekly, quarterly, or monthly) SWPs allow you to decide how much money you want to withdraw and how frequently. On the predetermined date, the money goes straight to your linked bank account.
What is STP (Systematic Transfer Plan)?
For various reasons, investors sometimes need to shift funds from one mutual fund scheme to another. A Systematic Transfer Plan lets them do just this, slowly over a period of time. The fund which contains the accumulated wealth is called the source or transferor fund, and the fund where the money goes is called the destination or target fund. For a transfer to happen, both mutual fund schemes must be offered by the same asset management company.
For example, suppose an investor has been investing in a high-risk equity mutual fund to plan for their child’s education for 10 years. Say, in a couple of years, as the time for using the funds nears, the investor wants to reduce exposure to market volatility to keep the accumulated capital safe. Through an STP, the investor can slowly transfer the funds from the high-risk equity mutual fund to a more stable debt fund. This reduces the risk of market downturns affecting the child’s education fund. The investor can avoid the risk of poor market timing and benefit from rupee cost averaging as well.
Usually, however, investors use STPs to transfer money from a liquid fund to an equity fund. For example, if you receive a large bonus that you’d want to invest in an equity mutual fund but have concerns about the market conditions, you can first invest the money in a liquid fund. You can then set up an STP which will allow you to transfer a fixed amount regularly into the equity fund. Investing a large lump sum in equities can be quite risky, that’s why most investors prefer to take the STP route and reduce exposure to market volatility. And just like SIP and SWP, you have complete control over the amount you want to regularly transfer as well as the frequency of the transfers.
Comparison Table: SIP vs. SWP vs. STP
Have a look at the difference between SIP STP and SWP in the table below:
| Factor | Systematic Investment Plans | Systematic Withdrawal Plans | Systematic Transfer Plans |
| Description | SIPs allow individuals to invest in mutual fund schemes through fixed, regular contributions. | With SWPs, individuals can periodically make withdrawals from their mutual fund investments. | Through STPs, individuals can invest a large sum in one type of mutual fund scheme and then slowly transfer it to another mutual fund scheme. |
| Who’s It For? | SIPs can be used to achieve short-, mid-, and long-term financial goals. They are ideal for investors looking to build wealth in the long term. For example, young investors just starting their retirement planning journey. | SWPs are ideal for individuals looking to generate a stable source of income. For example, retirees. | Investors looking to gradually move a large sum from a low-risk mutual fund to a higher-risk fund or vice versa can benefit from STPs. For example, investors with large investible surplus looking to slowly gain exposure to equity. |
| Risk Management (Volatility) | Market volatility is managed through rupee cost averaging. | Withdrawals are generally made from safer funds, so volatility management is less relevant for SWPs. | STPs manage volatility by spreading the transfer of funds over time. |
| Goal | The goal of SIPs is to help investors realise their financial dreams and build long-term wealth. | Income generation is the aim of SWPs. | STPs aim to manage risk by gradually transferring funds from one mutual fund to another. |
| Taxation | Whenever you redeem your SIP, a capital gains tax is applicable depending on how long you held the investment (LTCG and STCG). | Every individual withdrawal gets taxed (as capital gains) because you are redeeming mutual fund units. | Each transfer counts as a redemption in the source fund and a purchase in the destination fund, which incurs capital gains tax on the profit. |
In a nutshell,
- The key difference between SIP and SWP is that SIP allows you to systematically grow your investment, while SWP is about systematically withdrawing the funds you have already invested.
- The main difference between STP and SIP is that SIP is about regularly investing a fixed amount to grow your money over time, while STP is about slowly moving your existing investments from one fund to another.
Benefits of SIP, SWP, and STP
Each of these three – SIP STP SWP mutual fund plans offers unique advantages:
Benefits of SIP
- SIPs instil a habit of investing regularly. This makes you more financially disciplined and helps you accumulate significant wealth over the long term.
- One of the biggest advantages of SIPs is compounding interest. Basically, compound interest is the interest you earn on interest. With SIPs, your returns get reinvested into the scheme which helps you earn more. The longer you stay invested, the more apparent the magic of compounding becomes.
- SIPs are affordable. One need not have a large surplus to start investing which makes SIPs accessible for all investors. You can get started for as low as Rs. 500!
- SIPs are suitable for a variety of investors – conservative, moderate, and aggressive due to the variety of mutual funds available in the market.
- Since you invest a fixed amount in regular intervals, you buy more mutual fund units when the NAV is low and fewer units when the NAV is high. Over time, this can help you average out the cost of your investments and reduce the impact of market volatility. This is called rupee cost averaging.
- Another key benefit of SIP is diversification. Your money gets invested in a portfolio holding a variety of securities such as stocks, bonds, and other assets across different sectors and industries. This reduces the risk associated with any single investment or sector.
Benefits of SWP
- SWPs are good for generating income. Individuals such as retirees can particularly benefit from SWPs.
- SWPs allow investors to choose how much they can withdraw from their investment and how often. If investors choose a lower percentage that can stretch their corpus longer.
- The corpus stays invested and continues to generate returns, so it’s still growing even as you are withdrawing money.
- These plans are also tax efficient as it’s just the capital gains on the withdrawn amount that are getting taxed.
Benefits of STP
- STPs can help you rebalance your portfolio based on your investment goals and risk tolerance. For example, if you are nearing your long-term financial goal you can move funds from equity to debt fund.
- You can also transfer funds from debt funds to equity funds and manage market risk.
- STPs allow you to set the amount you want transferred and how frequently.
As you can see, all three – SIP STP SWP plans have benefits depending on your investment strategy.
Choosing Which One is the Right Fit for You?
Now that you know the SIP STP SWP difference, you can decide which one is right for you. If your financial goal is to build wealth for short-, mid-, and long-term goals, SIP is your best option. SWP is ideal for those individuals who already have a large corpus and are now looking to generate a regular income. Individuals looking to gain market exposure by transferring funds from a debt scheme to an equity scheme or managing risk by doing vice versa should look into STPs. To choose between sip and swp you should also consider your age and financial situation. SIPs are good for younger investors wanting to accumulate wealth steadily whereas SWPs are generally for older individuals looking to generate a regular income during retirement.
FAQs
Which is better for long-term investment: SIP, SWP, or STP?
If you’re looking for a long-term investment, SIP would be best. With an SIP, you can contribute fixed amounts regularly in a mutual fund that matches your risk tolerance and financial goals. This small but consistent start will help you build wealth over time, by taking advantage of compounding and rupee cost averaging.
Can I use SIP, SWP, and STP together in my investment strategy?
Yes. With an SIP you can build a corpus by investing in a high-returns mutual fund. Once your corpus grows, you can use an STP to slowly shift funds from the high-risk fund to a more stable debt fund. And finally, whenever you need regular income, you can set up an SWP to withdraw a fixed amount from your debt fund.
Which is better, SIP or STP?
SIP and STP serve different purposes. SIP is an investment plan where you invest a fixed amount regularly in a mutual fund scheme. STP on the other hand, is a transfer plan through which you can move your accumulated capital from one mutual fund to another in instalments. SIPs give you an affordable way to invest in mutual funds. WIth STPs, you would generally need a large lump sum investment in the source fund before it can be transferred.
How does an STP work in mutual funds?
STP stands for Systematic Transfer Plan. This plan allows you to slowly transfer your investment from one mutual fund to another. For example, if you have money invested in a debt fund but want to shift to an equity mutual fund for better returns, an STP lets you move the investment in instalments. Instead of transferring the entire amount in one go an STP spreads the transfers over a period of time. This keeps you safe from market risks. Both the source fund and the target fund, however, should be offered by the same asset management company.
Can I do SIP and SWP together?
Yes, you use both SIP and SWP together, but not in the same scheme. For example, you can invest in a fund through SIP while also using a SWP to withdraw funds from a different mutual fund scheme.
Can I modify the amount of my SIP investment?
Yes! Most SIPs allow you to change the amount you want to contribute regularly. As your financial situation or market conditions change, you can alter the amount to suit your needs. Some SIPs even allow you to temporarily pause your contributions without having to cancel the plan altogether.
How can a SWP provide regular income?
With an SWP you can withdraw a fixed amount of money regularly from your mutual fund investment. The remaining balance in your investment will continue to stay invested and can grow based on the performance of the mutual fund.
