SIP vs SWP vs STP: Key Differences & Benefits

Among the various investment strategies, three terms are frequently mentioned: Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP). While these plans share similarities in their systematic approach, they serve different purposes and cater to distinct financial needs. Let’s compare: SIP vs SWP vs STP.

What is SIP?

A Systematic Investment Plan (SIP) is a disciplined and popular investment method that allows investors to invest a fixed amount regularly (e.g., monthly or quarterly) in mutual funds. 

It's a great way to build wealth over time without the need to time the market. 

SIPs offer the power of compounding and rupee cost averaging, which helps investors average out the cost of investments across market cycles.

Key Features of SIP:

• Regular Investment: You invest a fixed amount regularly (e.g., Rs. 5000 (AED 216)*/month) into mutual funds.
• Rupee Cost Averaging: When markets are down, your fixed contribution buys more units; when markets are high, fewer units are purchased. This averages the cost of your investment over time
• No Market Timing: You don’t need to worry about when the market is up or down
• Compounding: Over time, you earn returns on your initial investment as well as the returns generated

Benefits of SIP:

• Affordable: You don’t need a large initial amount to start investing
• Flexible: You can change the contribution amount or frequency as needed
• Long-Term Growth: Ideal for long-term financial goals like retirement planning or wealth creation

Example of SIP:

Let’s say you invest Rs. 5000 (AED 216)* per month for 12 months in a fund with a Net Asset Value (NAV) of Rs. 30 (AED 1.3)*:

• In the first month, at Rs. 30 (AED 1.3)* NAV, you buy 167 units (5000/30)
• In the second month, at Rs. 20 (AED 0.8)* NAV, you buy 250 units (5000/20)

Thus, SIP helps you buy more units when the NAV is low and fewer units when it is high, helping you to manage your investment cost over time.

What is SWP in SIP?

A Systematic Withdrawal Plan (SWP) is essentially the reverse of SIP. Instead of investing a fixed amount regularly, you withdraw a fixed sum from your mutual fund at regular intervals. This plan is ideal for individuals looking to generate a steady stream of income from their investments, especially retirees or those in need of regular cash flow.

Key Features of SWP:

• Regular Withdrawals: You can withdraw a fixed sum monthly, quarterly, or annually
• Redemption of Units: The fund units are redeemed at the prevailing NAV to fulfill your withdrawal
• Capital Growth: The remaining units continue to grow within the fund, based on the market performance

Benefits of SWP:

• Income Generation: Provides a regular income stream for retirees or those needing cash flow
• Tax Efficiency: You can withdraw only the capital gains, which may reduce tax liability
• Flexibility: Choose how much and how frequently you want to withdraw

Example of SWP:

If you invest Rs. 10,00,000 (AED 43,254)* in a mutual fund and wish to withdraw Rs. 5000 (AED 216)* per month, the AMC redeems the necessary units at the prevailing NAV. If the NAV is Rs. 20 (AED 0.8)*, then Rs. 5000 (AED 216)* is equivalent to 250 units.

What is STP?

A Systematic Transfer Plan (STP) is used to gradually transfer a fixed sum of money from one mutual fund scheme to another at regular intervals. This strategy is beneficial when you want to manage risk or shift funds based on market conditions. Typically, STP is used to move money from a low-risk fund (e.g., a debt fund) to a high-risk fund (e.g., an equity fund) and vice versa.

Key Features of STP:

• Transfer Between Funds: Money is transferred from one mutual fund to another, typically from a low-risk fund (like debt) to a high-risk fund (like equity)
• Gradual Transfer: Transfers happen at regular intervals, allowing you to take advantage of changing market conditions
• Risk Management: Helps manage risk by shifting funds between asset classes

Benefits of STP:

• Risk Management: STP gradually exposes your money to higher-risk assets (like equities) while keeping part of it in safer assets (like debt)
• Capital Appreciation: Helps you grow your money while minimising volatility
• Tax Efficiency: Transfers within the same fund house avoid capital gains tax

Example of STP:

If you have Rs. 5,00,000 (AED 21,627)* in a debt fund, you can set up an STP to transfer Rs. 10,000 (AED 433)* each month into an equity fund. This allows you to benefit from market opportunities while managing your exposure to risk.

*Note: INR to AED exchange rate is subject to change. Hence, it’s better to check the rates before making any decision.

SIP vs STP vs SWP: Detailed Comparison

Here’s a detailed breakdown for you to compare and check SWP, SIP, or STP which is better —

SIP Calculator

SIP vs STP vs SWP: Which One Is Right for You?

The choice between SIP, SWP, and STP depends on your financial goals and stage in life. Here’s how to decide —

• Choose SIP if you want to grow wealth over time, plan for long-term goals like retirement, or prefer a disciplined way to invest small amounts regularly
• Choose SWP if you have already accumulated a large corpus and are looking for a steady stream of income, especially in retirement
• Choose STP if you want to manage risk by gradually shifting funds between different mutual fund schemes, for example, from debt to equity or vice versa

Tax Considerations

• SIP: Tax is applicable on the capital gains when you redeem the units, depending on the holding period (Long-term Capital Gains or Short-term Capital Gains tax)
• SWP: Each withdrawal is treated as a redemption, and capital gains tax applies based on the redemption amount
• STP: Each transfer is considered a redemption in the source fund and a purchase in the destination fund, subject to capital gains tax

Frequently Asked Questions