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SIP, STP and SWP : Mutual fund mumbo jumbo

Stock markets can often be extremely volatile.

To minimize the negative impact of these violent movements, one should (almost) always take a slow and steady approach to equity investment.

This is where mutual funds prove their excellence, with facilities such as SIP, STP and SWP.

Among these, SIP (Systematic Investment Plan) is already well-known, well-established and quite popular among millions of investors.

However, STP (Systematic Transfer Plan) and SWP (Systematic Withdrawal Plan) are comparatively lesser known and lesser understood concepts.

This article explains the difference and (more importantly) the utility of each of these three "Systematic Plans".


a. SIP - Systematic Investment Plan

Lot has already been said and written about SIPs.

So I will not spend much time on it.

Instead, you may read the following insightful posts, for some eye-popping revelations:
- Vermaji's Investment Secret To Fabulous Gains
- Become Rich SIP By SIP
- Why No One Pocketed 22% P.A. Tax Free Income?

what-does-sip-stp-swp-mean
Are you completely bamboozled by the terms SIP, STP and SWP?

b. STP - Systematic Transfer Plan

SIP works when your regular monthly income, is the primary source of money, for investing in the equity funds.

But what if you receive a large lump sum amount, for example your annual bonus?

Naturally, you shouldn't suddenly invest huge money one-time into equity. This is where STP comes into play.

Systematic Transfer Plan is essentially a two-step investment process.

Step 1: Park the lump sum amount in liquid funds or ultra short-term debt funds.
Step 2: Transfer a fixed amount every month from the above fund(s) to the equity fund.

Your final investment objective is the particular equity fund(s). As such, you should ideally park your lump sum amount in the liquid / ultra short-term fund belonging to the same fund house as your desired equity fund(s).

Then, you don't have to manually do the transfer each month. All you have to do is to issue the necessary 'transfer' instructions while investing in liquid fund / ultra short-term fund. Thereafter, the fund house will ensure that the desired amount is automatically switched to the equity fund every month.

In this manner, you can "conveniently" spread out your equity investment over say 6 to 12 months, depending on the amount involved.

Thus, STP allows you to enjoy the benefits of SIP.

More importantly, your balance amount is not lying idle in a savings account, as it normally happens. Instead, it is earning safe and secure returns of around 6-9% p.a., typically possible in a debt fund.

As is obvious, it is called 'systematic transfer' because the money is transferred every month from one fund to the other. 


c. SWP - Systematic Withdrawal Plan

Similar to not investing large amount one-time into equity, it is not prudent to withdraw large amount one-time from equity.

Suppose your investment objective was to accumulate money for your child's graduation.

Given the stock market volatility, you should not wait till s/he is 18 and ready to join a college. If you wait till the fag end, you face the risk of catching the bear market. If so, you would be forced to sell your equity portfolio at subdued prices.

Rather, you should start withdrawing your money regularly and systematically every month, starting say six months to one year prior to the target date.

In fact, you can do an SWP using STP. In other words, instead of "redeeming" part equity every month, you can "transfer" the amount to an ultra short-term debt fund. This ensures that the amount withdrawn continues to generate decent income, till it is finally redeemed for the desired purpose.

SWP has another use:

It can be structured as a source of regular income.

You need not depend on the (uncertain) "dividend payout", if you desire a steady stream of cashflow coming in from your investments.

Instead, you can stay invested in the "growth" option. And instruct your mutual fund house to redeem part units every month, to pay you a specified sum. (In fact, in certain cases, this would be a more tax efficient alternative.)


This, in a nutshell, is all about the SIP, STP and SWP mumbo jumbo.

Important Points to Consider:
1. Depending on specific circumstances, you can have a suitable combo of SIP-STP-SWP, so as to derive the maximum advantage.

2. Any transfer or switch is considered as a sale. Thus, depending on the type of fund and the period of investment, you could be liable for tax on capital gains and also the securities transaction tax. This can be minimized (or even eliminated) through proper planning.

3. There may be an exit load applicable. You need to ensure that the impact of such exit load(s) is nil or minimal.

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