We all come across the terms SIP, SWP and STP very frequently while dealing with mutual funds. SIP, SWP and STP are all systematic and strategic investment and withdrawal plans in Mutual Funds. Depending on the requirements of an individual, one can opt for either of the methods. In a nutshell, SIP, SWP and STP are systematic ways to do a transaction in mutual funds. SIP is to invest. SWP is to withdraw. STP is to transfer. Given all these options, what should you choose for?
Let us understand each of these in detail.
Systematic Investment Planning
SIP is a method of investing small sums of money on a regular basis in mutual funds to build a corpus over time. Investors buy units at regular intervals. Here, the money gets transferred from your bank account to Mutual fund investment every month or any other frequency that you opt for. The frequency of SIPs can vary – you can do a quarterly, monthly, weekly or daily SIP.
It can help an individual to do goal based investments. It ensures effective planning as you can start an SIP for each goal. The goal could be children’s education, buying a house, wedding etc. One can start investing with as little as INR 500. SIPs not only instill a good saving habit in the investors but the power of compounding also helps amass wealth. By spreading out the investments an investor can average out his purchase cost. In more technical terms, it is called rupee cost averaging.
SIP is more suitable for investors who earn a salary and is a bit difficult for them to invest a lump sum amount in Mutual Funds. But at the same time, investing a part of salary every month is convenient. It also prevents you from committing all your money at a market peak, and hence maximises returns.
SIPs have limited use in debt schemes as they are not as volatile or risky as equity schemes.
In Fact, investing in Equity linked Saving schemes can help you get deductions upto INR 150000 under 80C.
When should you opt for SIP?
If you are in the earning phase of your life, then this is the time to accumulate wealth. What better way to accumulate wealth than SIP. SIP is a useful strategy in the accumulation phase.
Systematic Withdrawal Plan
An SWP allows you to withdraw a specific sum of money from a fund at regular intervals. An investor first accumulates the money in a Mutual Fund scheme in some number of years. Then, the investor starts to redeem the money from the Mutual Fund scheme at regular intervals depending on the requirements. The frequency of SWP can be weekly, monthly, or quarterly. Basically, we can say it is the opposite of SIP. Here, the money gets transferred from your Mutual fund investment to your bank account.
But SWP attracts tax as every withdrawal is considered a redemption and capital gain is applicable. Considering one will be accumulating for a long period of time, so at the time of withdrawal, LTCG tax needs to be paid. SWPs provide the investor with a certain level of protection from market instability and helps avoid timing the market.
When should you opt for SWP?
It is generally suited for retirees who are typically looking for a fixed flow of income. So instead of lump sum and adhoc withdrawals, it is best that you give SWP instructions to the mutual fund that a fixed amount, say, 30,000 should be withdrawn from the mutual fund every month and gets credited to your bank account. Not only for retirement, one can use SWP to meet education expenses of children which are required at regular intervals.
Systematic Transfer Plan (STP)
STP is a method through which an investor agrees to give permission to the AMC to transfer money from one scheme to another in a systematic and periodic manner. Generally, an investor invests a lump sum in one scheme and transfers a fixed amount to another scheme within the same AMC.
In STP, funds are transferred, so each transfer is treated as a redemption and does attract a capital gains tax.
One of the major advantages of STP is that an investor can earn a little extra on the lump sum in a debt mutual fund while it is being deployed in equity, since debt funds provide better returns than a normal savings bank account. It also helps to rebalance the portfolio regularly.
Systematic Transfer plan is of three types namely –
- Fixed STP – Here, the investor decides the fixed sum of money to be transferred from one fund to another.
- Flexible STP – In this type,the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.
- Capital appreciation STP – Here, the investor takes the gain part out of one fund and invests in the other.
When should you opt for STP?
One opts for an STP when there is a lump sum amount to invest. It is suitable for individuals who have excess idle money lying in their account and are reluctant to invest the entire amounts into equity funds. As investing a lump sum in the equity market is not recommended looking at its volatility. In this case, the money is invested in a debt fund preferably a liquid debt fund and instructions are given to the mutual fund that a fixed amount should be transferred from debt mutual fund to equity mutual fund. That’s one way of using STP.
A person can also do an STP from equity mutual fund to Debt mutual fund. This will be used when a person is investing in an equity MF for a long term goal, say for Children education . But when a person is near to the goal, it is suggested that you start moving your money from equity funds to debt funds to reduce risk because of short term market volatility. This can be done by STP.
I hope that the difference is now clear among each of these SIP, SWP and STP options. With every method having its own set of features and advantages, an investor has to be careful while choosing the best option for him by considering the modalities and the suitability of the scheme and his goals.