Amid the huge variety of mutual fund options available for investment, there are also different modes of investment like SIP, STP and SWP. Sounds confusing? Let’s understand these terms individually and see how they differ from each other.
What is a Systematic Investment Plan (SIP)?
Systematic Investment Plan or SIP is a method of investing in mutual funds in a periodic and disciplined manner. Essentially, one can choose a fixed amount of money to invest in one’s chosen mutual fund scheme at fixed time intervals (weekly/monthly/quarterly/annual) as per one’s convenience.
SIP is an automated process, i.e., a pre-decided amount is automatically deducted from one’s bank account on the prescribed date and will be invested in the selected mutual fund scheme.
Investing via SIP enables the investor to invest regularly without being concerned about market volatility. This is by virtue of rupee cost averaging, wherein a low NAV allows one to purchase more units and vice versa. Investors can also benefit from compounding when the SIP is continued for a long period of time.
What is a Systematic Transfer Plan (STP)?
Systematic Transfer Plan or STP is a method to transfer the invested money from one mutual fund to another within the same fund house without actually redeeming the mutual fund units, waiting for the payout, and then reinvesting in the desired mutual fund scheme. Similar to SIP, in STP, the investor can preset the time frame, frequency, and the amount to be transferred. Also, the transfer takes effect immediately.
The benefit of STP is that it allows investors to invest a lump sum amount at any time in a liquid or debt fund and then transfer the investment to an equity-based fund periodically without the hassle of timing the market. It helps average the investment cost as in the case of SIP.
What is a Systematic Withdrawal Plan (SWP)?
Systematic Withdrawal Plan or SWP allows the investor to redeem and withdraw their investment from a mutual fund scheme in fixed amounts or as a percentage of the investment at fixed intervals over a fixed period of time. Every redemption reduces the number of units held by the investor in the scheme.
Therefore, while the investor gets a fixed income through periodic withdrawals, the rest of the amount that remains invested continues to remain so until it is withdrawn, allowing it to compound. Further, it protects one from market volatility because if the investor withdraws the entire investment at once, they could be at a disadvantage if they withdraw when the NAV is lower.
SIP Vs STP Vs SWP: Key Differences
As shown above, the key difference between SIP, STP, and SWP is that SIP is a way to ‘invest,’ STP is a way to ‘transfer’ one’s investment from one scheme to another, and SWP is a way to ‘redeem’ one’s investment in a disciplined manner.
The following table points out the key differences:
|Process||A fixed sum of money is invested in a mutual fund scheme at regular intervals by automatic deduction from the bank account.||The money is transferred from one mutual fund scheme to another scheme at regular intervals of the same fund house.||A fixed sum of money is withdrawn at regular intervals from the mutual fund scheme already invested in and periodically deposited in the bank account of the investor.|
|Taxation||No tax applies to investing. However, capital gains taxation is applicable on redemption, i.e., STCG or LTCG.||Tax is applicable on the transfer amount, as this amount is considered as redemption from the previous mutual fund scheme.||Tax is applicable on every transfer amount as it consists of capital gains.|
|Benefits||Power of compounding, reduced risk of market volatility and timing, rupee cost averaging, and disciplined investment approach||Consistent returns, portfolio rebalancing, reduced risk of market volatility and timing, rupee cost averaging||Power of compounding, withdrawal as per investor requirement, gains continue to accrue on remaining invested amount, no risk of market timing & volatility|
From the above table, one may use SIP, STP, and SWP to achieve one’s financial goals and to benefit from compounding while eliminating the hassle of timing the market.