In investing, chaos and random flukes will not help generate wealth. Moreover, there are better choices than lump sum investments for many today. What investors need is a system, a system that can help them benefit from diversification and compounding, save them from volatile markets and fulfil their short-term as well as long-term goals. 

That’s where the three systems of Mutual Fund Investing come in – Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP). Each system is unique and is meant for different investors with different purposes. 

SIP, STP, and SWP might seem complicated but don’t worry. We will explore these in detail to understand how each works and what essential benefits they offer investors. Give this article a quick read, and you’d realise they are very simple to understand and improve your investing strategy.

What Is SIP? 

Mutual Fund SIP plans were first introduced in the late 1990s in India. SIP or Systematic Investment Plan is a commonly used method of investing in mutual funds where, instead of investing a lump sum amount, you invest fixed smaller amounts over regular intervals in your preferred scheme resulting in a higher return. 

These intervals can be daily, weekly, fortnightly, monthly, etc. And since the amount invested is smaller, the risk is also lower. It is also beneficial for someone able to invest only a little money at once. 

How SIP Works? 

Let’s understand the straightforward process of Investing in SIP with an example. Raj is new to investing and saves a sum of money monthly. He chooses the fund he wants to invest in and links his bank account to the Fund House. 

He decides on a ₹1,000 monthly SIP on the 5th of each month. And he is done. Now, on the 5th of each month, ₹1,000 will get auto-credited from his account and invested in the fund. Remember that the bank account should have enough balance to pay for the instalment and keep a minimum balance, if any. 

Say the NAV of the fund is ₹10. So, he will get 100 units in the fund in the first month. If the NAV increases to 11 in the next month, he will get allotted only 90 units; if it falls to ₹9, he will get 111 units. This will continue until he decides to end the SIP. 

Benefits Of SIP

SIP poses a lot of advantages over lump sum investing. 

• Power of Compounding

SIP helps you magnify your wealth using the power of compounding. The profits you earn via a SIP get invested back into the fund. This reinvestment over a longer time frame helps compound the corpus. 

• Rupee Cost Averaging

Investing in a SIP helps average out the cost per unit over time as you buy more when the NAV is low and less when NAV is high. This is called Rupee cost averaging.

• Financial Discipline

Regularly investing inculcates a sense of financial discipline and is easy for even investors with little to no market knowledge. It is a great way to build wealth in the long term. 

• Ease and Convenience of Investing

Investing in a SIP is a simple process using which anyone can start their investing journey with as small an amount as ₹100.

What Is SWP? 

A Systematic Withdrawal Plan or SWP allows investors to withdraw a fixed amount from a mutual fund scheme they have already invested in at regular intervals. Like a SIP, one can set the amount and interval per your preference. 

Investors can also choose to withdraw their profits and keep the capital intact. At the set date, some of your units will be sold, and the funds will be transferred to your account as long as you have balance units in the scheme. 

How SWP Works? 

SWP works in quite the opposite way than that of a SIP. Your funds go from your mutual fund investment to your bank account instead of vice versa. To start regular withdrawals, investors can initially invest a large corpus or choose the SWP option in an existing mutual fund investment. 

Say Rahul has 10,000 units in a scheme with a NAV of ₹10. He decided to start a monthly SWP of ₹5,000 starting 2nd June. On the day of withdrawal, the fund manager will redeem 500 units, and ₹5,000 will be debited in Rahul’s account. The number of units to be sold will keep changing, depending on the NAV. 

Benefits Of SWP

Some of the benefits offered by SWP are listed ahead. 

• No TDS 

In an SWP, unlike the dividend option of a mutual fund scheme, there is no Tax Deducted at Source (TDS). However, capital gains tax is applicable depending on the amount and the type of scheme. 

• Rupee Cost Averaging

Like a SIP, an SWP also offers the benefit of rupee cost averaging. When withdrawing at regular intervals, you will redeem more units when the markets are low and fewer units when the markets are high. So, investors need not worry about timing the market and saving themselves from potential losses. 

• Regular Earnings:

SWP facilitates a regular income that can benefit investors who need a stable cash flow to sustain a living, such as retirees and pensioners. 

What Is STP?

A Systematic Transfer Plan (STP) periodically transfers funds from one mutual fund scheme to another. The whole process is seamless and instantaneous but only works within two funds offered by a single asset management company. 

The fund with the initial lump sum investment is called the source or transferor scheme. The scheme to which the funds get transferred is known as the target or destination scheme. 

How STP Works?

A Systematic Transfer Plan (STP) combines an SWP and a SIP. Let’s understand how. 

For instance, Ranbir received a ₹50,000 bonus from his company and wants to invest the sum. But he thinks that the equity market is too volatile at the moment. So instead of putting the full in a savings account or a fixed deposit, he invests it into ABC Liquid Fund and starts an STP to transfer ₹1,000 every month to ABC Equity Fund. 

Every month ₹1,000 would get withdrawn from the ABC Liquid fund, i.e. the transferor scheme, just like an SWP. Instead of going to Ranbir’s bank account, the funds would be invested in the ABC equity fund’s target scheme, which imitates a SIP. 

Benefits Of STP

Let’s see how investors can benefit from an STP.

• Safe and High Returns

Liquid or Debt Funds usually offer 3-4% more returns than interest on Savings accounts or an FD. Combining that with an even higher return of an Equity fund, investors can take advantage of an STP and maximise their profits. STP returns are also reliable and steady. 

• Minimising Risks

Using an STP, investors can transfer their funds from a risky to a less risky asset class during a highly volatile period or vice versa in a booming equity market. This allows them to safeguard their wealth while also maximising returns.

• Balanced Portfolio

A mixture of equity and debt instruments is necessary for a growing portfolio. An STP helps rebalance your portfolio by moving investments from equity to debt for a risk-averse investor or vice versa for an investor with a risk-taking appetite.