Understanding STP and SWP

 To earn long term capital appreciation, one must inculcate the discipline of systematic investing. Giving your investments a disciplinary approach will only enhance the future outcome. We all invest so that we can earn some returns and improve our existing financial condition. Becoming wealthy overnight is almost impossible and this is why a step by step approach is necessary to give your investments the direction they deserve.

To have a strategy while investing in mutual fund is always a good idea because it gives you the right direction. New investors must be aware of the fact that there are ways to systematically invest as well as withdraw from their mutual fund investments. While SIP or Systematic Investment Plan is ideal for goal based investing and to target long term goals, STP and SWP are two other investment tools that can help mutual fund investors carefully manage their finances.

To understand what STP and SWP are and how investors can inculcate in their financial planning, continue reading –

What is STP?

Systematic Transfer Plan or STP is an approach where an investor give the Asset Management Company a consent to transfer their money from one mutual fund scheme to another. This transfer of money happens systematically and in a periodic manner.  However, investors here should bear in mind that they can only transfer money from one fund to another, both belonging to the same fund house. One cannot opt for a STP between funds belonging to two different fund houses. Usually the investor invests in a liquid fund or an ultra-short term fund and later the sum is systematically transferred and invested in an equity fund. This way of investing in mutual funds is ideal for anyone who has surplus cash sitting idle and can park their money in a liquid fund and earn some interest. Investors who do not wish to make lumpsum investments in equity and want to invest small amounts can opt for an STP too.

What is SWP?

A Systematic Withdrawal Plan is exactly the opposite of a Systematic Investment Plan. While SIP gives investors an opportunity to invest small amounts at regular intervals, an SWP is a withdrawal plan where investors can redeem fixed sums at regular intervals. Investors first invest in schemes that require a low risk appetite such as liquid funds. Then depending on the investor’s income needs they can start withdrawing the predetermined sum. The frequency of the SWP can vary from monthly to quarterly to every six months. SWP as an approach can be opted by those seeking regular income, like retired people.

STP v/s SWP