Differences Between SIP, SWP, and STP
Understanding SIP, STP and SWP:
In mutual fund investing, individuals come across different plans designed to help them manage their investments and achieve their financial goals. Three popular options are Systematic Investment Plans, Systematic Transfer Plans, and Systematic Withdrawal Plans. They sound similar, but each of these plans – SIP STP SWP has its own purpose. So, let’s understand what these plans are and how they are different in detail.
What is SIP (Systematic Investment Plan)?
One can invest in mutual funds in two ways. Investors can either make a one-time, large investment called a lump sum investment, or they can choose to invest a fixed amount of money regularly through Systematic Investment Plans. Not only are SIPs affordable but they also offer many advantages like compounding interest, rupee cost averaging, flexibility, and instilling a habit of disciplined saving and investing in investors.
Every mutual fund scheme has an NAV (Net Asset Value), which is basically the price of one of its units. This NAV is updated daily based on the fund’s market performance. Every time you make a contribution to the fund, you are buying units at that day’s NAV price.
After you have set up your SIP, the money will get automatically deducted from the bank account you’ve linked on a predetermined date, and get invested into your chosen mutual fund.
One of the key benefits of SIPs is their flexibility. You can easily change the contribution amount or adjust the frequency of your investments as per your financial goals or situation. Should you face any financial emergencies, many SIPs offer the option to temporarily pause your contributions without completely cancelling the plan.
What is SWP (Systematic Withdrawal Plan)?
A Systematic Withdrawal Plan is like the opposite of an SIP. With SIP, you are putting a fixed amount regularly into a mutual fund of your choice. On the other hand, with SWP you are withdrawing a fixed amount regularly from your mutual fund investment. When you withdraw your money, you are actually redeeming the units of your mutual fund at the prevailing NAV.
This means the amount you receive depends on the current NAV on the day of withdrawal. You withdraw these instalments until your investment corpus is fully redeemed. With each withdrawal, the number of units in your mutual fund goes down till it reaches zero. But until then the remaining balance will continue to grow and generate returns based on the market performance of the fund.
SWPs are ideal for individuals who have already amassed a large corpus and are looking to receive a steady stream of income. These plans are generally preferred by retirees as they allow them to meet their financial needs without having to liquidate their entire investment at once. Just like SIPs let you decide how much you want to invest and how often (weekly, quarterly, or monthly) SWPs allow you to decide how much money you want to withdraw and how frequently. On the predetermined date, the money goes straight to your linked bank account.
What is STP (Systematic Transfer Plan)?
For various reasons, investors sometimes need to shift funds from one mutual fund scheme to another. A Systematic Transfer Plan lets them do just this, slowly over a period of time. The fund which contains the accumulated wealth is called the source or transferor fund, and the fund where the money goes is called the destination or target fund. For a transfer to happen, both mutual fund schemes must be offered by the same asset management company.
For example, suppose an investor has been investing in a high-risk equity mutual fund to plan for their child’s education for 10 years. Say, in a couple of years, as the time for using the funds nears, the investor wants to reduce exposure to market volatility to keep the accumulated capital safe. Through an STP, the investor can slowly transfer the funds from the high-risk equity mutual fund to a more stable debt fund. This reduces the risk of market downturns affecting the child’s education fund. The investor can avoid the risk of poor market timing and benefit from rupee cost averaging as well.
Usually, however, investors use STPs to transfer money from a liquid fund to an equity fund. For example, if you receive a large bonus that you’d want to invest in an equity mutual fund but have concerns about the market conditions, you can first invest the money in a liquid fund. You can then set up an STP which will allow you to transfer a fixed amount regularly into the equity fund. Investing a large lump sum in equities can be quite risky, that’s why most investors prefer to take the STP route and reduce exposure to market volatility. And just like SIP and SWP, you have complete control over the amount you want to regularly transfer as well as the frequency of the transfers.
Comparison Table: SIP vs. SWP vs. STP
Have a look at the difference between SIP STP and SWP in the table below:
In a nutshell,
- The key difference between SIP and SWP is that SIP allows you to systematically grow your investment, while SWP is about systematically withdrawing the funds you have already invested.
- The main difference between STP and SIP is that SIP is about regularly investing a fixed amount to grow your money over time, while STP is about slowly moving your existing investments from one fund to another.
Benefits of SIP, SWP, and STP:
Each of these three – SIP STP SWP mutual fund plans offer unique advantages:
Benefits of SIP:
- SIPs install a habit of investing regularly. This makes you more financially disciplined and helps you accumulate significant wealth over the long term.
- One of the biggest advantages of SIPs is compounding interest. Basically, compound interest is the interest you earn on interest. With SIPs, your returns get reinvested into the scheme which helps you earn more. The longer you stay invested, the more apparent the magic of compounding becomes.
- SIPs are affordable. One need not have a large surplus to start investing which makes SIPs accessible for all investors. You can get started for as low as Rs. 500!
- SIPs are suitable for a variety of investors – conservative, moderate, and aggressive due to the variety of mutual funds available in the market.
- Since you invest a fixed amount in regular intervals, you buy more mutual fund units when the NAV is low and fewer units when the NAV is high. Over time, this can help you average out the cost of your investments and reduce the impact of market volatility. This is called rupee cost averaging.
- Another key benefit of SIP is diversification. Your money gets invested in a portfolio holding a variety of securities such as stocks, bonds, and other assets across different sectors and industries. This reduces the risk associated with any single investment or sector.
Benefits of SWP:
- SWPs are good for generating income. Individuals such as retirees can particularly benefit from SWPs.
- SWPs allow investors to choose how much they can withdraw from their investment and how often. If investors choose a lower percentage that can stretch their corpus longer.
- The corpus stays invested and continues to generate returns, so it’s still growing even as you are withdrawing money.
- These plans are also tax efficient as it’s just the capital gains on the withdrawn amount that are getting taxed.
Benefits of STP:
- STPs can help you rebalance your portfolio based on your investment goals and risk tolerance. For example, if you are nearing your long-term financial goal you can move funds from equity to debt fund.
- You can also transfer funds from debt funds to equity funds and manage market risk.
- STPs allow you to set the amount you want transferred and how frequently.
- As you can see, all three – SIP STP SWP plans have benefits depending on your investment strategy.
Choosing Which One is the Right Fit for You?
Now that you know the SIP STP SWP difference, you can decide which one is right for you. If your financial goal is to build wealth for short-, mid-, and long-term goals, SIP is your best option. SWP is ideal for those individuals who already have a large corpus and are now looking to generate a regular income. Individuals looking to gain market exposure by transferring funds from a debt scheme to an equity scheme or managing risk by doing vice versa should look into STPs. To choose between sip and swp you should also consider your age and financial situation. SIPs are good for younger investors wanting to accumulate wealth steadily whereas SWPs are generally for older individuals looking to generate a regular income during retirement.
Please note,
The views in the article/blog are personal and that of the author. The idea is to create awareness and for educational purpose and not intended to provide any product recommendations.
