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Mutual Funds - Decoding SIP, SWP and STP

10 Jun 2019

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Systematic investment plan (SIP) 

SIP allows you to choose a fixed amount of money to invest on a fixed date every month, for a certain period in a mutual fund scheme. “The amount is auto-debited from your account on that date and is invested in the pre-specified scheme," said Ankur Choudhary, co-founder, Goalwise. You can invest as low as 100. An SIP by itself does not carry any charges. However, asset management companies charge expense ratio for managing your money. “For equity funds, expense ratio is 1.5-2.5% per annum (pa) and for debt funds it is in the range of 0.5-1% pa," he said. “SIP is best suited for inculcating the habit of regular savings for long-term goals and works well for salaried individuals," said Chitra Iyer, founder, My Financial Advisor.

SYSTEMATIC WITHDRAWAL PLAN (SWP)

SWP is used to make recurring withdrawals from your mutual fund investments. “A fixed amount of money is withdrawn from your investments on a fixed date and is deposited in your bank account linked to the investments," said Choudhary. You can start an SWP if the minimum investment balance in your mutual fund is 25,000, he said. You first have to invest a lump sum in a mutual fund scheme and set a withdrawal mandate of a fixed amount from that investment. You can withdraw the amount from your investments either monthly or quarterly. “Your existing investment keeps generating returns," said Iyer. It works when you don’t have a regular source of income. “SWP can be used to create a monthly pension from your retirement corpus," said Choudhary.

“You can think of STP as a combination of SWP and SIP," said Choudhary. “If you have your savings in a lump sum and do not want to enter the markets in a jiffy, then STP is a good option for you," said Iyer. STP involves giving consent to a mutual fund to periodically withdraw a certain amount or redeem certain units and invest the proceeds in another scheme of the same fund house. “Generally, investors park their lump sum amount in a liquid fund and register an STP to an equity fund of that scheme," said Iyer. The mutual fund that you ultimately transfer your money to should be from the same mutual fund house. The minimum STP amount depends on the fund scheme and fund. “It can start from 1,000 and has no specific upper limit," said Choudhary.

Source: Live Mint BACK

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