Maher 26 software engineer was keen to understand investment options like SIP, STP, and SWP in the mutual funds. He wanted to understand which option will be better for him, SIP vs STP or SWP.
Mutual Fund-SIP vs STP vs SWP
Table of Contents
Difference Between SIP, SWP, and STP
Certainly, Meher was also confused about which option to choose and what will be better for him. Should opt for SIP or STP ? What is SWP in mutual funds?
In this post, we will explore about on the three options namely
- systematic investment plan (SIP)
- systematic transfer plan (STP)
- systematic withdrawal plan(SWP)
Let’s talk about each one of the option one by one and what is the impact of these options on your Investments
Systematic Investment Plan (SIP)
The systematic investment plan is a way to invest in mutual funds where you deposit money each month through auto-debit facility. You can understand it like an RD in bank with better returns.
Basically, it is a monthly investment arrangement.
In the case of Mehar, he is a software engineer and getting a regular monthly income.
Hence he can start investing in mutual funds through SIP. Let’s say he opts to invest Rs 10000 each month to invest in a mutual fund scheme. Then the way of investment is called Systematic Investment Plan or SIP.
In order to start your SIP you can refer to the post
Mutual Fund SIP-Systematic Investment Plan II Step by step guide on How to Start a mutual fund SIP
Here he is following a system i.e. a fixed amount at a fixed date and for a fixed duration. The amount is auto-debited from the bank account.
Who should invest through SIP
If you want to accumulate wealth in the long run and you have monthly income surplus than you can invest through SIP.
It is a very good option to invest in SIP to accumulate wealth.
What is STP & how does STP works
Here STP stands for Systematic Transfer Plan. Here in STP, you transfer your money in small chunks to a targetted mutual fund scheme.
Let’s understand with Meher’s example.
Let’s assume that Meher, recently got some incentive/bonus from his company and he wants to invest in equity mutual fund. But he was afraid of market volatility and his heart sinks thinking about a market crash.
Thus whats the alternative.
He can invest through STP. Here in STP he can invest in a safe debt fund preferably a liquid mutual fund or ultra-short duration mutual fund and start an STP to a targetted equity mutual fund.
He can opt for STP and give a standing instruction to shift a prefixed sum or prefixed unit to targetted equity mutual fund on a daily /weekly/fortnightly/monthly basis.
What are the Benefits of STP
- In the case of lump-sum investment also, you get value cost averaging i.e. you enter the market at different prices thus reduces market risk.
- It saves you from sudden market crash price fluctuations also.
- You keep on getting good interest from your liquid mutual fund which is higher than your saving bank account.
- you get safety and investment both at the same time.
Which is better SIP or STP
Well, this depends on your cash flow. Both strategies are equally good.
If you have monthly cashflow then SIP is a safer and effective bet for you. STP is good for lump sum investments.
But if you say, I have a lump sum amount and I will start SIP from this than you will loose on returns.
The main difference between SIP and STP is the mode of payment.
In the case of SIP, you invest monthly and in case of STP, you invest a lump sum amount in a debt fund and shift this money periodically to targetted equity mutual fund.
What is SWP
SWP stands for Systematic Withdrawal Plan, which is a facility (option) given by mutual fund houses to withdraw your money in a systematic manner (chosen by investor-duration, frequency, etc).
SWP is not a predefined scheme, it is an option/service given in all mutual fund schemes.
This option can be used at any time when you require regular periodic payments fom your money.
Procedure for starting/Opting SWP
STEP 1
You deposit a lump sum amount in a mutual fund Scheme or you have an existing investment in a mutual fund scheme.
STEP 2
Fill an SWP Form( or do it online) mentioning your scheme name, required money each interval, and date from which you wish to start taking your withdrawal amount.
You have to mention the SWP cancellation/completion date as well.
What you can expect from this option:
- You can expect a rate of interest approx 7%-8% from this option if you opt for a safer option like liquid mutual fund or low duration mutual fund or 7%-10% if opted for Debt balanced/dynamic asset allocation funds.
- Here you should be mentally prepared to have fluctuated maturity value.
- The little risk involved in the scheme. It is not 100% safe as Govt. Schemes.
- Like Govt. schemes interest rate/return is not fixed.
- Usually, interest is a little better than fixed deposits or at par with it but nothing is guaranteed.
- Money Payment starts from next month from the date of deposition as it takes a month to set up an SWP.
SWP Calculator
If you want to check out SWP Calculator, please watch out the video.
Conclusion:
SIP Vs STP Vs SWP are the three options to invest in mutual funds. If you want to accumulate wealth and you have monthly surplus income than SIP is the best option.
STP is for the lump sum amount invested in a debt mutual fund scheme and shift/transfer money to targetted equity mutual fund.
SWP is good for those who want to take income from their money.
