SIP vs STP vs SWP - Suitability, Tax Impact, Advantages

Understand the Difference between SIP, STP and SWP

SIP or Systematic Investment Plan

Systematic Investment Plan is a disciplined way of investing in mutual funds which allows investors to regularly invest a fixed sum of money over periodic intervals. This helps to build a large corpus through small periodic investments over a period of time. SIPs in different mutual fund schemes can be planned as per the investors’ requirements with respect to risk appetite, return expectations, investment horizon & financial goals. 

Advantages of SIP

  1. Financial Discipline: Systematic Investment Plan provides a disciplinary approach for making investments wherein you would need to invest a fixed amount over periodic intervals i.e weekly, monthly, quarterly, semi-annually, etc.
  2. Rupee Cost Averaging: One of the main benefits of doing SIPs is the concept of Rupee Cost Averaging. As SIP investments are made regularly, you are able to buy more mutual fund units when the markets are falling and lesser units when markets are moving upwards. Therefore, the average cost of your investments reduces over time through regular investments and you earn higher returns over the long term along with lower costs & volatility.
  3. Small & Periodic Investments: SIPs lets you make small periodic investments for meeting long term financial goals. This way, it becomes pocket friendly for everyone to make investments as per their needs & requirements. Investors can start their SIPs with as low as Rs.100 or any other amount as required by the scheme.
  4. Power of Compounding: The power of compounding helps to generate good wealth over a period of time. As your returns are reinvested in the scheme to further earn more returns on investment.

STP or Systematic Transfer Plan

A Systematic Transfer Plan is a plan that lets investors transfer/switch their mutual fund units regularly from one scheme to another scheme in the same fund house. STP allows investors to plan their investments as per their current requirements & investment needs. Also, volatility in investments is reduced by following a systematic approach of staggered investments.

Advantages of STP

  1. Rupee Cost Averaging

Just like SIPs, investments are made periodically in other schemes under STP plans too. This helps to average out the cost of MF units over time which leads to higher returns coupled with lower average costs.

2. Rebalancing of Portfolio

STP plan facilitates rebalancing the mutual fund portfolio of investors depending upon the market conditions & requirements. The portfolio rebalancing needs can be easily met by opting for an STP plan wherein one can choose to switch from equity oriented scheme to a debt oriented scheme and vice-versa. If the composition of equity in the MF portfolio exceeds the decided allocation, then one can simply choose to switch that portion to debt funds and do the reverse if the debt allocation in the portfolio exceeds the decided allocation.

3. Consistent Returns

STP plan lets you earn steady & consistent returns during the tenure. Say, you want to switch from a debt fund to an equity fund. While making monthly transfers, you keep on earning returns on the portion left in your previous investments along with the returns from fresh investments in the other scheme.

STP plans also offer other benefits such as lower volatility in investments, a disciplined approach to investing, etc.

SWP or Systematic Withdrawal Plan

An SWP or Systematic Withdrawal Plan is a plan which allows investors to make regular & fixed withdrawals over periodic intervals such as monthly, quarterly, semi-annually, etc. as per the requirements of investors. This plan is very suitable for individuals or senior citizens who want to have a fixed income for meeting their regular expenditures. Moreover, it's a good way to redeem your investments in a staggered manner as you also earn tax-efficient returns on the remaining portion.

Advantages of SWP

  1. Regular Income: SWP plans can offer a regular income through fixed withdrawals at predefined intervals. This is very helpful for meeting the regular income requirements & recurring expense needs of the investors. It can be used as a pension for individuals/senior citizens where they can earn good returns on the remaining investment by way of regular withdrawals.
  2. Tax Efficiency: Systematic withdrawal plan can offer tax-efficient gains as gains earned after a specific period will be taxed with lower rates. Periodic withdrawals from SWP instead of a lump sum redemption would provide tax-efficient gains on the units redeemed in the holding periods offering tax advantages.

In Equity oriented funds, capital gains earned on units sold after 1 year are taxed at the rate of 10% on the gains exceeding Rs1 lakh. In the case of Debt oriented funds, capital gains earned on units sold after 3 years are taxed at the rate of 20% after indexation benefits.

3. Flexibility: The SWP plan offers flexibility to investors for choosing their withdrawal amount, frequency of withdrawals such as monthly, quarterly, etc. as per their requirements.

4. Lower Volatility: Volatility in returns is reduced through periodic withdrawals. As withdrawals are made across market conditions, average costs & volatility get reduced which leads to good returns over the long term.

Comparison between SIP, STP & SWP

  • Nature: SIP is an investment plan where regular contributions are made by investors. STP is a transfer plan which allows investors to transfer their investments from one mutual fund scheme to another as per the requirements. In STP, investors can transfer their money from one scheme to another within the same fund house. Therefore, transfers from or to schemes of other fund houses are not allowed.

And SWP is a withdrawal plan which lets investors make regular withdrawals from their existing mutual fund investments to fulfill their needs. 

  • Taxability: In the case of SIP, each SIP is treated as a separate investment for the purpose of tax calculation on gains while making redemptions from the scheme. In STP, each transfer is treated as a redemption, and therefore gains on investment are taxable. Gains on individual withdrawals from the SWP plan are taxable.

The taxability on gains in mutual fund investments depends upon the holding period (STCGs & LTCGs) & type of scheme (Equity/Debt oriented) selected for investment.  

  • Suitability: SIP investments are suitable for regular savings & investment requirements of the investors. This can help to generate capital appreciation over the long term. STP plans are suitable when the investor needs to make a switch into other schemes depending upon their risk-return characteristics & financial goals.

SWP plans are suitable for meeting the regular income needs of individuals such as senior citizens. Moreover, SWP plans could be opted for meeting the recurring expenditures like EMIs, School/College fees of children, etc. which allows earning good returns along with making regular payments.

Nature of planInvestmentTransferWithdrawal
How it works?Regular & fixed investments over predefined periodic intervals.Regular & fixed amount transfer from one mutual fund scheme to another.Regular & fixed withdrawals from the schemes for a predefined period of time.

Each SIP is treated as a separate investment for tax calculations.

Tax is only applicable to the gains earned on investments after they are sold.

The applicable STP tax depends on two factors – the type of fund you transfer from and the duration of your holding periodGains on withdrawals are taxable depending upon the holding period & type of scheme.
SuitabilitySuitable for long term capital appreciation.Ideal for transfers to other schemes depending upon needs.Suitable for regular income & recurring expenditure needs.

More Information: 

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