SIP vs SWP vs STP
13 June, 2024
Synopsis
SIP, or Systematic Investment Plan, involves investing a fixed, pre-determined amount in a mutual fund at periodic intervals, such as monthly or quarterly.
An STP, or Systematic Transfer Plan, enables regular transfers of a fixed amount from one mutual fund to another within the same Asset Management Company.
SWP, or Systematic Withdrawal Plan, involves selling mutual fund units to withdraw a fixed amount regularly into the bank account.
SIPs invest in a fund, STPs transfer between funds, and SWPs systematically withdraw from a fund, catering to different investment objectives.
The HDFC Bank SmartWealth App simplifies investment by offering user-friendly features for efficiently executing SIPs, STPs, and SWPs.
It was lunchtime. Most employees were enjoying lunch, but a tense-looking Akash, a young professional, was frantically scrolling down his mobile while sitting on the stairs leading to the office café. He caught the eye of his team lead and mentor, Ramesh. After finishing his lunch, Ramesh came out of the café with two cups of coffee and sat beside Akash.
Ramesh: You look stressed. Again, looking at the plethora of investment options?
Akash: I am confused! SIP vs STP vs SWP... they sound like Greek to me.
Ramesh: Don't worry, I was in your shoes once. Let's understand these investment tools over coffee. Let's take them one by one.
Ramesh: SIP or Systematic Investment Plan is a method of regularly investing a fixed pre-determined amount in a mutual fund, at periodic intervals like monthly or quarterly.
For example, investing ₹5,000 every month on the 5th in an equity scheme is an SIP.
Akash: Okay, so we invest in instalments. How does this help?
Ramesh: A SIP requires discipline to invest since the amount is auto-deducted monthly from your bank account. You also get rupee cost averaging, as the same amount buys you more units when the market falls. This reduces risk and is a better way to invest with low amounts.
Akash: Great benefits! What about STP, then?
Ramesh: STP or Systematic Transfer Plan allows you to transfer a fixed amount regularly from one fund to another. In short, units from a mutual fund are redeemed to invest in another mutual fund of the same Asset Management Company.
For instance, ₹10,000 can be moved monthly from a liquid mutual fund scheme to an equity one.
Akash: So, we transfer the amount between mutual fund schemes. Why would someone do this?
Ramesh: It helps in tactical asset allocation. For example, one could park money in a low-risk liquid mutual fund scheme and transfer small amounts regularly into a higher-risk equity mutual fund scheme, which balances the risk.
Akash: I see! Finally, can you explain what SWP is?
Ramesh: An SWP, or Systematic Withdrawal Plan, is the reverse of a SIP, in which you sell mutual fund units to send money to your bank account. It allows you to withdraw a fixed amount from a mutual fund scheme regularly.
For example, you could withdraw ₹20,000 monthly from a debt mutual fund scheme into your bank account to meet expenses.
Akash: Oh, I get it! It generates regular income from your mutual fund investment.
Ramesh: Exactly! SIPs invest in a fund, STPs transfer between funds, and SWPs systematically withdraw from a fund. The HDFC Bank SmartWealth App makes investing easier than ever.
Akash: How can I start with the SmartWealth app?
Ramesh: It's straightforward! Here are the steps:
Login and click on the Dashboard tab at the bottom of the page
Select the Holding tab and click on Mutual Funds
Pick a fund and click on ‘Switch (STP), STP / SWP under Quick actions
Choose transfer details on date, amount, frequency, etc.
Review and submit requests after OTP validation.
That's how HDFC Bank SmartWealth App smartly clears all doubts and makes systematic investments extremely simple.
Akash: Thank you. You have helped me solve the SIP vs. STP vs. SWP puzzle! It's time to put them to work!
FAQs
Can you do SIP and SWP together?
While the SIP and SWP combo product offers a unique approach, it also has drawbacks, such as limited investor flexibility due to pre-determined terms and restricted investment options. When opting for a particular fund house, investors are confined to choosing source and target schemes from that same fund house, and the available specific schemes may be limited.
What does the 4% SWP rule mean?
The 4% rule is a guideline for retirement savings withdrawals. It suggests that you can withdraw 4% of your initial retirement savings in the first year of retirement and then adjust that amount annually for inflation.
Suppose Ramesh, a 60-year-old resident of Mumbai, has accumulated a retirement corpus of ₹5 crore (₹50 million). According to the 4% rule, Ramesh could withdraw ₹20 lakh (₹2 million, which is 4% of ₹5 crore) in the first year of his retirement.
In the following year, if the inflation rate is 5%, Ramesh would adjust his withdrawal amount by the same percentage. So, in the second year, he could withdraw ₹21 lakh (₹2.1 million, which is ₹20 lakh plus a 5% increase). This pattern would continue for the remaining years of his retirement, with the withdrawal amount adjusted annually for inflation.
It's important to note that the 4% rule is a general guideline and may not be suitable for everyone. Several factors, such as investment returns, inflation rates, retirement duration, and individual circumstances, can influence the sustainability of this approach.
Is SWP better than SIP?
SIP and SWP serve different purposes. SIPs are for achieving investment objectives, while SWPs provide regular cash flow. By integrating the two, you can enjoy the benefits of both: achieving investment objectives while receiving regular cash flows. However, conducting due diligence before investing in either avenue is essential to thoroughly evaluate the investment options.
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