Just SIP’ing? Meet SWP & STP, Members Of Mutual Fund Family

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"Do you invest in Mutual Funds?"

"No, I invest in SIP. Mutual funds are risky."

"Where does your SIP money go?"

"I don't know but it's definitely better than a mutual fund."

How often have you heard people say this? Quite often, I am sure. There is this deep penetrated belief that in SIP investment money goes to SIP, which they think is some sort of investment instrument. Over the years, due to aggressive marketing campaigns spearheaded by the mutual fund companies, the term SIP has gained immense popularity. Just like "Googling" has become a synonym for web searching, SIP has become a synonym for a mutual fund. The term mutual fund has been markedly overlapped by SIP so much so that people often say, "I am investing in HDFC SIP" or "SBI SIP" while the fact is they are investing via Systematic Investment Plan (SIP) in HDFC and SBI mutual funds. The meaning of SIP can be explained in one line - it's your monthly contribution to your mutual fund.

SIP is just one dimension of a mutual fund. There are various other facets of mutual fund which are not as well known as SIP. Like SIP there is Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) which can enhance the value of your investment if used intelligently.

Let's explore the possibilities of SIP, SWP & STP.

What Is SIP?

A SIP is a plan through which an investor can invest a fixed amount on the regular basis in a mutual fund scheme.

The Benefits Of SIP

Financial Discipline- The biggest advantage of SIP is that it instills financial discipline in your life. As your financial goals are heavily dependent on discipline and timeliness, a regular SIP helps you stay ahead in your investment.

Benefit Of Averaging - As we mentioned earlier, SIP helps you to invest regularly without worrying about market cycles. For example, if you have to invest a lumpsum amount in a mutual fund you have to wait for the right time when the markets have bottomed out. But this is easier said than done. Timing the market is a difficult task. However, if you invest via SIP you are regularly entering the market regardless of the market situation. As you invest through the thick and thin of the market your investment averages out giving you good returns. Thus it is safe to say that SIP is the best way to invest in a mutual fund.

Power Of Compounding - When you stay invested for a long-term you experience the magic of compounding. Some call compounding the eighth wonder of the world. When you invest over a long period, you start to earn interest on the interest. This is called compounding. Compounding helps you to build a big corpus, over a long period of time, with regular small investments.

The secret of compounding is that the longer you hold your investment better results you get. It's simple yet difficult because to hold a stock/mutual fund for a long period requires a lot of patience. Watching your money grow is a painfully slow and frustrating process. As you go through the investment cycle, you face many tumultuous situations which test your patience. Therefore, patience, though sounds easy as a concept, is extremely difficult to practice.

SIP Or Lumpsum - What's The Best Method?

SIP is not the only way of investing in a mutual fund. In SIP, you invest in portions while lumpsum, as the word suggests, is where you go all in, in one go. The debate of lumpsum vs SIP is going on for ages.

Let's settle it once and for all.

The reason all the investment and financial advisors recommend to invest via SIP is simple - when you invest a small amount on a regular basis you have a better chance of beating the market volatility. For example, if you have Rs.1,00,000 and you invest it lumpsum in a mutual fund you get units worth 1,00,000 as per the market situation. If the market is up you get fewer units while you would get more if the market is down. In lumpsum investment, the key to success is to time the market which is an extremely difficult task.

On the other hand, if you invest the same Rs.1,00,000 in 20 portions of Rs.5,000 on a monthly basis, you totally nullify the market volatility as you buy irrespective of market conditions. Therefore, you get an advantage of averaging and you don't have to worry about timing the market.

Verdict: SIP increases your chances of better returns.

How To Invest In Mutual Fund Via SIP?

These days all the Asset Management Companies have direct plans where you have to select the fund from the vast pool of funds on your own. All you have to do is visit the website select one of the best SIP plans calculate your SIP amount on the SIP calculator and start a SIP online. The only condition is that you have to be KYC compliant. It's literally a matter of few minutes to start investing in a mutual fund.

What Is SWP?

If you know how SIP works then understanding Systematic Withdrawal Plan (SWP) would be easy. Essentially, SWP is exactly opposite to SIP. In SIP your objective is to accumulating units to build a big corpus via regular investments. In SWP you withdraw a fixed amount on a regular basis (monthly, quarterly or annually) from your fund. The amount to be withdrawn and the frequency of withdrawal is to be decided by the investor.

Still confused? Let's take an example to understand SWP better.

Suppose you have been investing in a mutual fund and have accumulated 20,000 units of a mutual fund scheme. Now you have instructed your AMC (fund house) to credit Rs. 20,000 to your bank account every month through SWP.

The Net Asset Value (NAV) of your fund is Rs.20 right now. Therefore, to withdrawing Rs 20,000 from the scheme means selling 1,000 units (Rs 20,000/Rs.20). After doing a withdrawal, your mutual fund account will have 19,000 units (20,000-1000).

If at the start of the next month, the NAV of the fund is Rs.40. In that scenario, withdrawal of Rs.20,000 would amount to selling 500 units (Rs 20,000/Rs 40). Your mutual fund account will be left with 18500 units (19,000-500). With each withdrawal, the number of your units keeps declining. However, as NAV keeps fluctuating, an increase in the NAV would need lesser units for redemption and vice-versa.

Benefit of SWP

As you don't withdraw the entire corpus in lumpsum you get to stay invested in the fund and experience the growth for a longer period.

Downside Of SWP

In equity, the markets keep falling and rising. This aspect can be disregarded while you are investing through SIP, but when you are regularly withdrawing through SWP, in the falling market, you need more units to redeem your monthly payout. If a considerably long market downfall coincides with your SWP plan you will get far less value for your accumulated units. That is the reason SWPs that lack intelligent planning can have detrimental effects on the value of your fund.

It is advisable to all the investors that while opting for SWP be extremely careful to get the due diligence done by your financial planner.

Is SWP Taxable?

As SWP is a form of a regular payout, the obvious question as to follow - is SWP income taxable? Yes. SWP income is treated as a redemption and will be subject to tax.

If the investor holds the fund for less than 36 months, then the amount withdrawn by the investor will be considered a part of his/her income and will be taxed according to the income slab. In case the holding period exceeds 36 months, then the amount withdrawn will be subject to long-term capital gains tax of 10% (without indexation) and 20% (with indexation).

The point to remember here is that SWP can only be done in an open-end mutual fund. While opting for any mutual fund service i.e. SIP, SWP & STP investors have full freedom to redeem the entire invested amount at any time of their choosing. They can also stop or modify the SWP & STP amount as well. An SWP & STP can be done in all types of funds be it equity, debt or balanced.

What Is STP?

A Systematic Transfer Plan is one of the services provided by the mutual fund companies. STP is used by the investors to transfer their money from one asset class to other. For example, if you have accumulated a corpus in an equity fund, you can transfer that money from equity to debt, in small portions, over a period of time.

But under what circumstances investors opt for STP?

Imagine you have invested Rs.5,00,000 in debt funds because the markets were clocking new highs every week. Six months down the line, the markets have fairly corrected and have become attractive for investors. However, there is still apprehension about the market further correcting. In this situation, if you transfer your entire Rs.5,00,000 to an equity fund, there is a possibility of the market going down and you losing money. On the other hand, by not investing, you might miss the chance of entering at the right time as the market may bottom out and go up.

In this scenario, your best chance is to opt for an STP. An STP will transfer your funds from debt to equity in portions over a period of time. This way, whether the market moves up or down you get a fair opportunity to average your returns.

The Ideal Plan For SIP, SWP & STP

For a working professional, who has busy day-to-day life, there can't be a better investment medium than a mutual fund. Now that SIP has become a thing of a popular culture, all the salaried and business professionals have started investing via SIP with a long-term view. But SIP is just a part of your investment sphere. There are other dimensions like SWP and STP which can be utilised to get the maximum value of your hard earned money.

Let's illustrate this point with an example.

Amit is young IT professional. At the age of 30 he starts investing in an equity mutual fund through a regular SIP of Rs.10,000. Amit has a target of accumulating a retirement corpus of Rs.2 Crore in the investment period of 30 years. To Amit's surprise, due to the favourable market condition, he achieves the target in just 25 years. Now Amit is facing a dilemma - whether to redeem his funds and withdraw the entire amount or to stay invested for next 5 years.

Staying invested in the same fund is risky as the markets might turn around in future and reduce the value of Amit's money. To counter the market risk, Amit decides to go for Systematic Transfer Plan (STP). Now Amit has instructed his fund house to transfer his corpus of Rs.2 crore to a Debt Fund over the next 1 year. As debt fund gives less but fixed returns, Amit's corpus will keep growing for next 5 years without any risk.

After 5 years, Amit's corpus in the debt fund has become Rs.2.44 crore with the annualised return of 5%.

Now retired, Amit is facing another dilemma - whether to withdraw the money in full or to opt for Systematic Withdrawal Plan (SWP)?

After calculating his monthly expenses and consulting his financial advisor, Amit come to a conclusion that he should go for an SWP. He gives instruction to his fund house to credit Rs.1,00,000 into his account every month.

With this arrangement, Amit will keep getting Rs.1,00,000 every month for next 20 years. Also, as his corpus will stay invested in a debt fund, it will keep growing with time.


Looking at Amit's investment journey, it becomes clear that he is a smart investor. He stayed invested in equity for a long period to grow his capital and later moved to debt fund to preserve his capital. He intelligently exploited equity for growth and debt for stability. By doing so, Amit has secured a happy and self-sufficient retirement for himself.

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