SIP, STP & SWP

SIP, STP and SWP

These are terms associated with the Mutual Fund industry.

SIP stands for Systematic Investment Plan,

STP stands for Systematic Transfer Plan and

SWP stands for Systematic Withdrawal Plan

 

 

The expansion of these terms makes definition of these terms quite self-explanatory. However how each of these work & the purpose for which these are used are different.

 

 SIP - Systematic Investment Plan. This is the most popular and most widely used of these 3 terms. SIP is very similar to a bank recurring deposits. In Recurring Deposit, a fixed sum of money is invested every month on a specific day and is cumulated for a pre-determined  period, normally in multiple of 12 months. At the end of this period the cumulated amount along with a pre-determined interest is repaid to the investor.

A person investing in SIP similarly sets aside a fixed amount every month which is invested in a mutual fund scheme. There is no pre-determined period as in RD. There is no pre-determined return. Normally SIP is used to invest in an equity mutual fund scheme. Equity as is its inherent nature does not give a fixed return. Equity markets tend to be volatile in the short term. But in the long-term equity has proved to be the best asset class in terms of returns. Therefore, a SIP investment in an equity mutual fund scheme should be for a long period, preferably 5 years or more. The idea behind investing in equity through SIP, is that it irons out the volatility of the equity market. By setting aside an equal amount every month one tends to buy more when the markets are low and buy less when the markets are high leading to what is popularly called as “Dollar Cost Averaging”. By following this strategy an investor can reduce the impact of volatility.

The purpose of SIP (in an equity fund) is to accumulate a corpus for a goal which is well into the future by averaging and taking advantage of high returns. There will be no tax outgo at the time of investing via SIP.

 

STP - Systematic Transfer Plan. This is small variation of SIP. This is best explained with the help of an example. Suppose a person gets a windfall of a lump sum of money, say a lottery or inheritance or retirement proceeds. He wishes to have a portion of this invested in an asset class the price of which tends to be volatile, say gold or equity. If this investor invests the bulk of the money in a debt instrument and transfers a fixed portion regularly from the debt instrument to the targeted asset class (where he ultimately wishes to invest) over a period of time say one year, he is said to have resorted to STP to transfer from debt to equity or gold. The advantage is that the amount does not get invested in the target asset class in one go, but the investing cost gets averaged out over a year.

The purpose of STP is to transfer bulk amount to a volatile asset class over a period of time without having to do it in a single shot.

Investor has to check the tax implication in respect of the amount withdrawn from the initial (normally debt) asset class.

 

SWP - Systematic Withdrawal Plan. As the name suggests, in SWP the investor withdraws a fixed amount at a fixed interval from a corpus. Whereas in a SIP/STP the amount ultimately gets invested in an asset class thereby creating a corpus, in SWP the corpus gets reduced as the investor withdraws amount from the investment created. This is normally resorted to by retirees who are in requirement of a regular source of cash for their routine requirements.

The purpose of a SWP is to create a positive cash flow to the investor.

Investor has to check the tax implication in respect of the amount withdrawn.

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