Often people get confused with the three terms, SIP, STP, and SWP, and end up using interchangeably due to the lack of knowledge. So, in this blog, we seek to discuss what is the difference between the STP, SIP, and SWP so that the investors use it diligently.
Systematic Investment Plan (SIP)
SIP is a systematic approach or way of investing in mutual funds. In this, an investor invests every month or quarter or year depending as per their comfort. So, here are some of the features of a SIP:
- No need to keep an eye on the market conditions
- Provides the benefit of compounding of money
- Offers benefits of rupee cost averaging
- No lots of paperwork
- The auto-debit facility from the fund houses
Systematic Withdrawal Plans (SWP)
SWP allows withdrawing money from mutual funds or MF systematically at a regular period of interval. Most of the time investors look for the SWP to either re-balance an existing portfolio or for meeting any expense or exigency.
Moreover, in simple words, you may also consider SWP to be the opposite of the SIP. Furthermore, in SIP, while you invest money systematically, in SWP, you withdraw money systematically.
Systematic Transfer Plan (STP)
STP or Systematic Transfer Plan 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 the month of December or November, and you are looking to invest the sum in your equity funds for around 5-7 years. Before choosing the funds and making the allocation, you should invest the amount in the liquid fund. This helps you to make sure that 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 the 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.