When Bestii Singh started his Mutual fund investments, the terms were overwhelming for him when he heard of SIP, STP & SWP strategies. He wanted to understand the differences between SIP Vs SWP vs STP.
Which suits him better. What strategy will be beneficial for him, whether SIP or SWP? How can he use STP for his better future? It was all confusing, and choosing one was even more difficult for him.
Table of Contents
What is a Systematic Investment Plan (SIP)?
The systematic investment plan ( SIP) is a way to invest a fixed amount regularly (usually monthly) into a mutual fund.
You just need to initiate once in the beginning and then automatic deduction of money happens every month.
SIP is suitable for:
- Long-term wealth creation
- Disciplined investing
- Starting small (as low as ₹500/month)
How it works:
Let’s say you invest ₹5,000 per month in an equity mutual fund. This amount gets auto-debited from your bank account and is used to buy fund units every month. You buy units every month.
The NAV of a mutual changes on daily basis and therefore you buy units at varied prices. Thus you benefit from rupee cost averaging and compounding over time.
In other words, SIP is a money instalment paying commitment for your chosen duration.
Example:
Bestii is a software Engineer who gets a regular monthly income. He wants to accumulate money by paying amount on monthly basis and grow his wealth.
He can do with the help of SIP.
Hence he can start investing in mutual funds through SIP. Let’s say he opts to invest Rs 10000 each month in a mutual fund scheme. Such an investment is called Systematic Investment Plan or SIP.
In order to start your SIP you can refer to the post
https://bestinvestindia.com/how-to-start-mutual-fund-sip/
Finally, SIP is a way to invest in mutual fund where you pay a fixed amount at a fixed date and for a fixed duration. The amount is auto-debited from the bank account.
What is SWP (Systematic Withdrawal Plan)?
SWP is the reverse of SIP. It lets you withdraw a fixed amount regularly from your mutual fund investment. To withdraw any amount from a mutual fund, you must have a large sum in your mutual fund account. You can set up a SWP and enjoy monthly, quarterly, half-yearly or yearly payouts.
SWP is for:
- Creating regular income (e.g., retirement income)
- Avoiding premature lump-sum withdrawals
- Tax-efficient withdrawals
How it works:
Say you’ve built a ₹10 lakh corpus. You set up an SWP to withdraw ₹10,000 per month. That amount gets credited to your bank account, and an equivalent number of units are sold.
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.
SIP Or SWP- Which is better?
During interactions with people, I found that people have all sorts of wrong ideas about SIP or SWP. Let’s understand it.
Few think it would be great if I could grow my money and take a monthly payout from mutual funds. But my dear friends it does not happen like this.
While in the case of SIP, ( for simplification, i am taking a monthly SIP example ), you pay a fixed amount, let’s say may be 10,000 or maybe 1 lac every month. By doing this, you are accumulating money. Thus, SIP is a money-appreciating/wealth-accumulating activity.
Whereas Via SWP, you are taking monthly payouts ( income). Here, you use your accumulated money to derive an income. You are earning interest from your deposited amount, and you are withdrawing it.
| Purpose | SIP (Systematic Investment Plan) | SWP (Systematic Withdrawal Plan) |
|---|---|---|
| Function | Regular investment | Regular withdrawal |
| Ideal for | Wealth creation | Income generation |
| Money Flow | From bank to mutual fund | From mutual fund to bank |
| Use Case | Salaried, wealth builders, long-term goals | Retirees, people needing monthly income |
| Returns | Compounding over long term | Based on fund performance and withdrawal rate |
| Taxation | Taxed only when you redeem | Each withdrawal is taxed as per capital gains rules |
| Risk | Subject to market risk (more in equity SIPs) | Depends on how much you withdraw and the fund performancethat sorts |
Expert Tip:
The smart strategy many investors use is to:
- Start with SIP to build wealth
- Then switch to SWP for regular income in later years
This is exactly what plans like ICICI Prudential Freedom SIP are designed to offer—accumulate first, withdraw later.
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.
