Systematic Methods – SIP, STP and SWP

I went about randomly asking some people if they know what SIP is. Most of them knew the basic concept. Some did not know the full form though.

Mutual funds have done a good job at making people aware of SIP.

Then I asked what is STP and SWP. Only a handful knew and I got some funny replies too.

Someone said STP is when you can transfer your SIP to me. OR transfer money from your SIP to my SIP.

Cute.

And so I decided to write on Systematic methods of Investing and withdrawal.

First thing first : SIP is not a Mutual Fund

You don’t invest in SIP. You invest in Mutual Fund(MF) via SIP.

SIP is not the end product. Mutual Fund is.

SIP is only a way in which your money travels from you to the mutual fund.

So, when you want to invest, right question is not which SIP should I start? Right question is which Mutual Fund scheme should I invest in to plan for my financial goals.

After that comes a decision to invest a lump-sum or SIP.

What is SIP?

SIP stands for Systematic Investment Plan.

It is a method of investing that allows you to invest a fixed sum in an investment instrument (like mutual fund) at a fixed interval.

Opting for SIP method for investing in Mutual Fund entails allowing auto deduction of fixed sum from your bank account at a regular interval (daily, monthly,quarterly, half yearly etc)

That’s why you have to submit a cancelled cheque copy and set up an auto debit mandate when you start the SIP.

The MF allocates you certain number of units depending on the NAV. So essentially, you buy more units every month. More on NAV here.

For the same amount invested every month, when the NAV is high, you get lesser units as compared to when the NAV is lower that buys you more units. In that sense, in Mutual fund, NAV is your purchase price.

Because you invest every month via SIP, your average cost of investment is balanced out over long term.

The biggest benefit of SIP I see is the discipline. You set up an auto mandate for a particular date. Now all you have to ensure is your account has required funds on that date.

Also, the fact that Mutual fund SIP can start with as low as Rs 500. Recently, one of my friends set up SIP for his cook. My mother had SIP set up for her employees so many years ago. SIP enables everyone to start investing for their future.

Regular investing also ensures you get benefit of compounding over long term. Because your monthly investments also start earning interest that is reinvested (for growth Mutual Funds).

How can I invest via SIP

I remember my mother took me to open my first MF account for SIP investing. We had to travel to the AMC (asset management company), fill in some forms and submit a cancelled cheque.

Then when I wanted to stop the SIP, fortunately enough and thanks to my laziness, I found it too much work to travel back to AMC and put up the application. The SIP continued and is alive till now.

But things are a lot easier now. You can invest directly on Mutual Fund sites, or myCams or Coin.

Enter details, upload a cancelled cheque copy, set up a mandate and you are done. Or you can still visit a Mutual Fund office and get this done there.

Off course, you should know which mutual fund scheme you want to invest in and how much. That depends on your financial goals, asset allocation, fund’s performance, risk tolerance etc.

What is STP?

Till now we know SIP in mutual funds sources funds from your bank account.

You want to set aside money, say Rs 5 lakh,to be invested in Equity Mutual fund, but don’t want to invest it in one go. On an average, interest earned on the savings account is around 3.5-4%. You want your funds to earn more than savings account return while keeping the funds out of reach to avoid unplanned spending.

STP is Systematic transfer plan.  It is a method that allows you to invest in one fund (source fund) and set up a systematic transfer to other fund(target fund) for a predefined amount on a fixed date.

Both funds should belong to same AMC.

This is mostly used for investing from Debt or Liquid funds into Equity fund to enjoy benefits of average cost and avoid timing the equity markets for investing.

Basis the amount you set for transfer, there are three types of STP :

  1. Fixed STP

    The amount you wish to transfer is fixed and pre-specified by you. This can be as per your financial goals, your investment bandwidth per month etc.

2. Capital Appreciation

   The amount you wish to transfer is only the profit you make on your lump-sum invested. Meaning, you invested Rs 10 lakh and at the end of one month, the source fund is at 10,06,000. Your capital appreciated by 6000 and this will be transferred to the target fund.

Since appreciation may vary every month, the transfer amount is also variable.

3. Flexi STP

    The transfer amount is not fixed and you specify it every month as per your requirements.

What is SWP?

The purpose of investing is to let your money grow for use later.

For use, you have to withdraw it.

Also, you may want to park your money in mutual fund and then systematically withdraw some amount to invest elsewhere.

STP works within same Mutual fund scheme only. To invest anywhere else, you will need to pull the funds from MF to your bank account and then re-invest or use as required.

SWP, Systematic Withdrawal Plan, takes care of such an arrangement.

Some examples can be when you receive your retirement corpus, or withdraw your PF at the age of 55 or 60 you can park the funds in a debt MF and set up a SWP for your monthly expenses.

When you take a break for two years, you can park your funds (that you have accumulated to cover for your break) in a debt MF and set up SWP to pay yourself every month for your expenses.

Important Points :

  • Every transfer in STP and withdrawal in SWP is treated as redemption. So all transfers made within first three years are subject to short term capital gains tax. The gains are added to your income and taxed as per your income slab.
  • SIP is a strategy. Now, you can also set up an systematic investment plan (SIP) to invest in direct stocks. So SIP is not limited to MFs only.
  • The method or combination of methods you use depends on your financial goals, planning, risk tolerance, redemption requirements etc.
  • Systematic methods aids in financial discipline and it is best to not give in to panic and stop the systematic plans during market volatility.

It is good to have an advisor or portfolio manager who can guide you on the strategy.

Agent does not qualify as an advisor.

Agent sells. He cares about his target more than your money.

Advisor advices. He may sell too. But he builds his reputation on his advice and therefore, has higher stake.

Now next time someone recommend you a new scheme and propose to start STP or SWP, make sure he know that you know.


Also published on Medium.

5 Comments

  1. Akanksha I am regular reader of your blog.In every blog you write about finance, it’s too good.I think we always say to our children..study well, bring good marks, than only you will earn good when you grow up.But No one teach their children rather Not any school ,college give education how to invest money So that money works for you not you works for money.I think this type of seminars should be conducted so that when children start earning they should start saving through SIP, STP..or..SWP.keep it up

    1. Thank you 🙂 I agree with you on how school education teach us nothing about money. And I like the idea of seminars in school! Thank you for being a regular reader 🙂

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