SIP vs SWP vs STP. Which one is better?
Which is better: SIP vs SWP vs STP? Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP) are the plans offered by the fund houses which are strategized in a way to suit the need of each of the investors.
A parent aiming to regularly save for his/her child’s education could choose a SIP. A retiree who has received lumpsum earnings from his PF could invest in SWP and receive regular income.
An employee who received a large bonus could invest in a debt fund, but also could reap the benefits of an equity fund by putting their money into STP.
- SIP: Systematic Investment Plan
- Benefits of SIP
- STP: Systematic Transfer Plan
- Types of STPs
- Benefits of STP
- SWP: Systematic Withdrawal Plan
- Types of SWPs
- Benefits of SWP
- SIP vs SWP vs STP
SIP: Systematic Investment Plan
By investing in equity funds that are more volatile, you reap the maximum benefits from the structure of the plan – compared to debt funds which are relatively stable.
Since you are investing at regular intervals irrespective of a market up/downturn, you receive the benefits of Rupee cost averaging – your cost of purchase is average over the time horizon.
Also, as the investment is in small amounts, you do not feel the burden of investing or your future goals forming a hindrance to your present commitments and expenses.
There are no tax implications in these plans, and ELSS schemes also provide provision for tax deductibility under Section 80C of the Income Tax Act 1961.
Types of SIPs
1. Flexible SIP
Flexi SIP allows the investor to change the SIP amount according to market fluctuations. The predetermined formula enables the investor to invest more when the market is low and reduces the investment when the markets perform well.
2. Step Up SIP
An investor can increase the investment amount or percentage at fixed intervals.
Step Up SIP is perfect for investors who fail to regularly increase their SIP amount when their income rises.
3. Perpetual SIP
When an investor begins a SIP, the SIP mandate requires them to enter the start and end date of the investment tenure. In some cases, investors fail to enter the end date.
Every SIP that does not have an end date becomes a perpetual SIP, and it will go on till 2099.
4. Trigger SIP
Trigger SIP allows investors to set a trigger value for the SIP investment. It can be when NAV falls to a particular level, specific dates, or even levels of an index like Nifty or Sensex.
You can decide when a certain amount should be withdrawn from your bank and utilized to purchase units of a selected plan.
Benefits of SIP
1. Financial discipline
When you opt for a SIP, you indirectly get into the habit of keeping aside an amount of money from your income for investment.
2. Fund managers
Mutual fund investments are supervised by professional fund managers who have proven experience in managing portfolios.
They observe market trends and make wise decisions in order to grow your money and minimize major losses.
3. Benefit from compounding
Compounding means you don’t just get the return on what you spend out of your pocket but also what you earn from it. This basically leads to your corpus getting richer with time.
4. Rupee cost averaging
When you invest an amount through SIP, you do not need to worry about timing the market.
You buy a high number of units when the NAV is low due to the markets, and on the other hand, you buy a lesser number of units when the NAV is high.
The cost of purchasing funds averages out over the period of investment.
STP: Systematic Transfer Plan
This plan allows you to transfer amounts from one fund to another (within the same fund house). There is typically a transfer of amount from Debt to Equity Fund and is suitable for risk-averse investors who fear market risks and fluctuations.
For example, if you have received a lump sum amount on account of your retirement or as a large bonus, you could invest in a liquid fund or debt fund.
At fixed intervals, as an investor, one could give instructions to shift small amounts into an equity fund.
Using this strategy, one eliminates the risk of investing a large amount at the wrong time in the market, thus averaging the cost of purchase.
It also obtains the advantage of constant reallocation of the portfolio with debt and equity, earning consistent returns (greater than the amount earned in a bank deposit).
The plan is similar to a SIP, but the amount is invested from your previous SIP instead of deducting the amount from your bank account. These plans do have tax implications.
Every transfer from one fund to another is considered as redemption from the fund and is charged capital gains tax (the investor enjoys the benefit of being initially invested in a debt fund but is charged capital gains tax for an equity fund – which is lower).
Compounding effects – as returns get reinvested at periodic intervals and rupee cost averaging are also the advantages of this plan similar to a SIP.
Types of STPs
1. Fixed STP
Fixed STP allows an investor to transfer a specific amount at a fixed frequency
2. Flexi STP
An investor can transfer an amount from a source to a specific fund according to market performance.
3. Capital Appreciation STP
The investor can choose to transfer only the returns from the source plan to a targeted plan and not the entire invested amount.
Benefits of STP
1. Rupee cost averaging
Similar to SIP, rupee cost averaging is also applicable for STP. Investors transfer fixed amounts to different funds at different price points, and hence the investor buys more units when the markets are low and buys a lesser amount when the markets are high.
Eventually, the purchase price averages out over the period of investment.
2. The returns are consistent
STPs give investors consistent returns. As the money is invested in debt and equity funds, the returns are better than fixed deposits provided by banks.
Portfolio rebalancing happens naturally in STP as an investor can transfer a portion of the invested amount from a debt fund to an equity fund on a regular basis. As a result, they earn more returns during their investment tenure.
SWP: Systematic Withdrawal Plan
This plan could be considered an opposite of a SIP, where instead of investing fixed small amounts at regular intervals, one withdraws fixed amounts from the fund.
The investor initially invests a large/lumpsum amount into the plan.
One can choose to receive fixed amounts at an instructed frequency (monthly, quarterly) known as fixed income withdrawal, or can choose to only receive the gains (ROI or returns) on the invested amount, which is known as appreciation withdrawal.
One can keep redeeming the amount until the balance with the fund reaches zero which can be considered as the maturity of the plan.
SWP provides the freedom of choosing the amount that an investor wants to receive calibrated according to his/her expenses, as opposed to a dividend plan of a mutual fund where the fund manager decides the dividend.
Each withdrawal attracts a capital gains tax as it is considered to be a redemption. However, this plan is considered the most tax-efficient route when compared to the dividend plan of mutual funds and fixed deposit interest accruals.
|Number of units held||1000|
|NAV at Withdrawal (assumed)||32|
Consider the example (as shown in the table). An investor has 1000 units in the ABC fund and has purchased them at a NAV of 30. Hence, his cost price per unit of the fund is Rs 30.
The investor has fixed instructions for withdrawing Rs 2000 every month.
In the first month of withdrawal, the fund made good profits and saw an increase in the NAV to 32. The units hence withdrawn would be Rs 2000/Rs 32 (current NAV) which is 62.5 units.
The cost price of these units was Rs 1875 (62.5 *30).
The gain made on the transaction is Rs 2000 – Rs 1875 = Rs 125. In an SWP the investor pays tax on the gains from the withdrawal or redemption. Hence, in the above example, one would be paying a capital gains tax of Rs 125.
However, if the investor had invested the same in an FD, he/she would have to pay tax on the interest income with the tax rate according to the individual’s tax slab (which is greater than capital gains tax).
Types of SWPs
1. Fixed amount SWP
The investor selects a particular amount and a specific date on which the amount will be withdrawn.
2. Appreciation SWP
The investor can withdraw only the returns on investment and not the principal amount.
Benefits of SWP
1. Financial discipline
An investor automatically receives a predetermined amount from their investment periodically. This can make them financially disciplined as they learn to live life with a limited amount per month.
It also protects them from withdrawing large amounts from their portfolio during a poor market performance.
2. Steady Income
They receive a steady income periodically, which can be a huge advantage to the investor in case of retirement or if they depend on a steady income to pay for their financial needs.
3. Achieve financial goals
The second mode of income can always be helpful if you are looking to achieve a financial goal, especially when you have monthly commitments.
SIP vs SWP vs STP
|Type||Regular Investment||Transfer from one fund to another||Withdrawal plan|
|Goal||Long-term investment to gain from the appreciation of the market||Capital Appreciation of the lump sum money received (idle money)||Regular income – Source|
|Process||Investing fixed amounts at a regular frequency||Asset reallocation by shifting a small amount between funds (Debt ? Equity)||Withdrawal at periodic intervals from the fund (opposite of SIP)|
|Tax implications||Investments do not attract tax capital gains are taxable (depending on the equity of debt and time period)||Every transfer is taxed and is considered a redemption from the fund||Gains from the withdrawal are taxed. Considered Tax efficient over FDs and other recurring income options|
|Typical Investor Profile/Suitability||Investors looking to save every month for a long-time horizon||Risk-averse Investors who have idle money (large corpus – retirement money or bonus)||Investors who would want a regular source of income and have a lump sum corpus in hand.|
Is SWP better than SIP?
SIP helps you invest money on a regular basis, while SWP ensures you receive a portion of your invested money regularly. You can opt for SWP when you have a big corpus. Choose the best option based on your financial status and long-term goal.
Are SIP and SWP the same?
SWP is a systematic withdrawal plan that helps investors regularly withdraw a portion of their money from their funds. SWP is completely opposite to SIP, as, in the latter, the investor invests a predetermined amount of money at regular intervals.
Is STP a combination of SIP and SWP?
The systematic investment plan, Systematic withdrawal plan, and Systematic transfer plan are all systematic methods of investing and withdrawing money. Each has its own advantages and purpose. STP allows investors to transfer investment amounts from one fund to another. SWP allows investors to withdraw money regularly, and SIP allows investors to invest money in regular intervals.