Often people get confused with the three terms, SIP, STP, and SWP, and end up using interchangeably due to lack of knowledge. In this blog, we seek to discuss what is the difference between SIP, STP, and SWP so that investors use it diligently.
Systematic Investment Plan (SIP)
SIP is a systematic way of investing in mutual funds. In this, an investor invests every month or quarter or year depending on the comfort. Some of the features of a SIP are:
- No need to keep an eye on the market
- Provides the benefit of compounding
- Provides benefits of rupee cost averaging
- No separate paperwork
- The auto-debit facility from the fund houses
Systematic Withdrawal Plans (SWP)
SWP allows withdrawing money from the money from a mutual fund systematically at a regular interval. An investor opts for the SWP to either re-balance an existing portfolio or for meeting any expense or exigency.
In simple words, you may also consider SWP to be the opposite of SIP. In SIP, while you invest money systematically, in SWP, you withdraw money systematically.
Systematic Transfer Plan (STP)
STP is a way of automatically moving out money from one fund to another. This plan is generally used when an investor is looking to invest a lump sum amount for the short-term before making the final allocation. For example, assume you have received your bonus payment from your employer in December/January, and you are looking to invest the sum in equity funds for around 5-7 years. Before choosing the funds and making the allocation, you should invest the amount in a liquid fund. This helps you ensure your funds are not lying idle at a 3-4% interest rate in the savings account. After investing in the liquid fund, you may finalize the equity funds and opt for STP from liquid funds to equity funds over 6-12 months. This way, you will be able to shield yourself from market timing while also getting the benefit of 7-9% returns for the funds lying idle.
Things to look out for a while considering SIP to invest and SWP to withdraw and STP to transfer –
Different asset classes such as equity, debt, gold, etc. have different traits in terms of risk, reward, and the likes. Thus, it is essential to define the right asset allocation to achieve the balance between risk and return at a portfolio level. Also, the portfolio risk and return profile should be in sync with the financial goals set. Thus, when you are opting for SIP or SWP, you should consider the pre and post-execution allocation so that your portfolio remains balanced in a way that reflects your conviction at all times.
Monitor your portfolio
When an investment portfolio is set based on the financial objective, the investor needs to monitor and track the investment portfolio and goals at regular in at regular intervals. On average, an investor must review the portfolio every quarter or half-year.
We believe any changes in the income, expenses, financial liabilities, etc. need to be incorporated in your financial plan from time to time.
To conclude, we can say that SIP, SWP, STP helps wisely plan investment and achieve an investor to achieve financial goals. An investor benefits in multiple ways such as rupee cost averaging, compounding, shielding from market time, and the likes. Also, before buying and selling any mutual fund, ensure you do your due diligence before betting on any of the funds.
Remember to check out your app – Tarrakki app that provides not only unbiased comparison on funds but also allows you to invest in lump sum, SIP, STP, SWP, and the likes. The app is available on iOS and Android.