The three key terminologies that every mutual fund investor may have come across are Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP). Many investors tend to be confused among these three. However, these are three distinct concepts with unique features, uses, and benefits. Here, we will explore these in detail to understand important benefits such that investors can make the most of each while investing in mutual funds.
SIP is mode of periodically investing small amounts in mutual funds to form a corpus in the long run. Since this mode allows the spreading of investment over a certain period, it helps investors in averaging out the cost of investment. It also prevents committing large sums into a single investment, especially during market peaks, thereby maximising returns. SIPs are preferred by investors since it instils an investment discipline in them. SIPs can be monthly, weekly or even daily.
STP is an option that allows mutual fund investors to transfer a fixed amount from one fund investment or scheme to another. This is mostly used in debt schemes where investors would have made a lump sum investment. The main usage of STP is to invest a lump sum amount in a debt scheme and transfer a fixed portion periodically to another scheme, such as equity funds.
STP allows investors to earn additional returns on the lump sum investment while they can transfer a portion of it into debt funds. An investor can choose the period over which he/she plans to transfer the money to another fund. STP can also be done from an equity to a debt fund, depending on individual financial goals. If opting for an STP to meet goals such as children’s education, retirement, etc, and the goal is nearing, investors should start the STP well in advance instead of waiting till the target date.
With SWP, an investor can periodically withdraw a certain amount of investment from a mutual fund. This mechanism benefits retirees who want a fixed or regular income flow. SWP offers protection from market fluctuations and avoids the necessity to time the market while redeeming an investment.
The table below shows a snapshot comparison between the concepts of SIP, STP, and SWP for better understanding:
SIP | STP | SWP | |
Type of plan | Investment | Transfer | Withdrawal |
Used for | Monthly investment in one scheme | Monthly transfer from one scheme to another | Periodic withdrawals from a scheme |
Goals | Long term capital growth | Capital appreciation of idle funds | Regular income source |
Taxation | No tax on investments. Capital gains tax applicable on returns | Since monthly transfer means redemption from a fund, tax is applicable on the amount redeemed | Withdrawals are taxed since these are gains from the redemption of units |
Here are some points on SIP, STP, and SWP that will help investors know when and how they can make use of these:
SIP, STP, and SWP are three smart investment options available for mutual fund investors. Investors should make the most of these to maximise capital appreciation and create a regular source of income while securing their investment.
Most SIPs do not allow changing the SIP amount once agreed upon at the start of an investment. However, there is flexibility to add another SIP if one wants to invest an additional amount in the fund.
Securities transaction tax or STT is levied while exiting an equity fund through STP. This is, however, not applicable to debt schemes.
Through SIP, investment is exposed to various market movements, thereby enjoying the benefits of rupee cost averaging.
SIPs enjoy the benefit of investing smaller portions in a phased manner and still gaining exposure to equity markets. On the other hand, equity investments may require substantial investment to gain good returns. These also require good knowledge of the markets, which is not necessary for SIPs.
It is not advisable to use STP for switching from debt to equity investments during market peaks. This is because equities would be costly during market peaks.
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