The SWP, STP and SIP are all ways and means by which investing in mutual funds is made convenient. While SIP is the most common, the other methods have not received as much of attention. Here’s to a basic understanding of each.
Systematic Withdrawal Plan, or SWP
What it is:
A SWP is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals.
When you automatically take money out of your mutual fund on a regular basis (fortnightly, monthly, quarterly), it is called a systematic withdrawal. At the set, predetermined date, units from your fund are sold and the money is sent to your bank account.
This generates an additional cash flow without the need for liquidating your entire investment. This is an excellent option for those who have retired. Since it is not possible to rely on dividends from funds, the SWP creates an annuity of sorts.
What to note:
This works best with an equity fund because growth is ensured even as you withdraw money from the corpus. To get the most out of it, build a sizeable corpus before you resort to this and ensure that all the units have been held for at least a year so you pay no capital gains tax. Read How to turn your fund into a retirement paycheck to understand this point better.
Systematic Transfer Plan, or STP
What it is:
The STP allows you to transfer money from one fund to another in a periodic and disciplined fashion. For example, you may wish to do an SIP in an equity fund. You can park the bulk amount in a debt fund, and a fixed amount can be systematically transferred to the equity fund every month.
Why put it in a debt fund in the first place and not leave it in your savings account? To simply enable your money to earn a higher return.
Alternatively, the reverse can also take place. You may be nearing retirement and would like to move part of your assets to fixed income products. Here the STP can take place from the equity fund to the debt fund.
What to note:
When you exit one fund, even if you are moving the money into another fund, it is considered a sale of units. So moving money from the debt fund to the equity fund will result in you paying capital gains tax. Because effectively you are selling the units in the debt fund. Check for exit loads too.
And STPs are only done within the same fund house. So both, the equity and debt fund must be from one asset management company (AMC).
Systematic Investment Plan, or SIP
What it is:
It is a planned approach towards investing. An investor selects the fund to invest in and the amount that should be invested every single month on a particular date. The money goes directly from the bank account towards buying units of the selected fund.
What to note:
To make it work, you need to have a long term perspective. In a rising bull market, you get lesser units for the same amount of money. But in a falling market, you gain more units. To benefit from an SIP, you need to ride the bear market and market slumps. If you invest only in a bull market and then stop when the market take a turn for the worse, you will lose out. So be consistent and steady and take a long term view.
MIP or SWP: Which is better?
3 basic questions on SWP answered
How to turn your fund into a retirement paycheck
