SIP Vs STP Vs SWP: Top mutual fund investment, withdrawal strategies and their benefits

STP rules out the risk of getting into the market at its peak by helping the investments spread over a period of time.

Investing in mutual funds through systematic investment plan (SIP) has become quite popular over the last few years. However, other than SIP, there are other systematic methods that serve the purpose of systematic investing and withdrawing. For instance, the Systematic Withdrawal Plan (SWP) and the Systematic Transfer Plan (STP) can also be used by investors to follow a systematic plan, depending on the type of investments they make.

If you are planning to invest in mutual funds, experts suggest you should know about all the different systematic plans, how they differ, and then decide which one to opt for.

Here are how the top mutual fund strategies work:

Systematic Investment Plan – SIP

The ‘Systematic Investment Plan’ is usually opted for its disciplined way of investing. Even though there has been an increase in the popularity of investing in MF through SIP over the last few years, experts say that most people are still confused about SIP, including those who have already made investments through SIP in mutual funds.

An investor chooses to invest a fixed sum of money over time, with an objective to build a corpus, which can be done through SIP. Through SIP one can build a corpus by investing small amounts of money over time. The investor can choose the frequency of SIPs – daily, weekly, quarterly, monthly, or yearly. Investors having a long investment period gets the benefit of averaging their cost of purchase, which balances the risk of investments. Additionally, by not pulling out the invested money at a market peak maximizes the returns.

Experts say investors planning to invest through SIP get the best benefit if they invest in equity funds through SIPs instead of debt funds. It is so because they are typically less volatile than equity funds.

Systematic Withdrawal Plan – SWP

The ‘Systematic Withdrawal Plan’ is just the opposite of SIP. With SWP investors get the option to withdraw a fixed sum of money from a fund at regular intervals, after investing a lump sum amount firstly in the fund. Simply put, through SWP, an investor invests a corpus first to withdraw a fixed monthly amount later.

Experts suggest, this is especially useful for the retired and senior citizens, who are looking for a fixed flow of income and want to get a monthly income for daily expenses. By investing through SWPs the investments made get protected from market instability and also market timing.

Systematic Transfer Plan – STP

Systematic Transfer Plan is for investors, who plan on investing a lump-sum. STP rules out the risk of getting into the market at its peak by helping the investments spread over a period of time.

With STP investors can invest a lump sum in a fund (usually a debt fund), and then transfer a fixed amount regularly to an equity scheme. With this process, investors get to earn a little extra on their lump sum investment while transferring the money in equity. While transferring the money, the investor has to decide the period over which he/she wants to transfer the money from one scheme to another, depending on the lump-sum amount. Note that, the larger the amount, the longer the time period.

Having said that, the STP process can also be done the other way around, from an equity fund to a debt fund. This totally depends on the investor, his/her age, goal, etc.