Understanding STP and SWP

Before looking forward to STP & SWP, which are Systematic Transfer Plans and Systematic Withdrawal Plans, we will have to understand what exactly are Systematic Investment plans, so let us start with the same. SIP has a quite simple attitude; it does what every other well-educated person plans. SIP is quite a simple and a hassle less method to invest money in mutual funds. You can choose to invest a fixed amount at a regular interval. This helps you to save the money for your future, and you can build an enormous wealth via the same method.

With the Systematic Investment Plan, you don’t need to worry about the transaction of the amount from your bank account to the funds, but it will be auto debited from your bank account on your salary day and will be invested into your mutual fund scheme. Every day you will be allocated with a certain number of units based on the ongoing market rate which is called as NAV or net asset value for the day.

Now let us talk about the Systematic Withdrawal Plan and Systematic Transfer Plans, starting up with SWP (Systematic Withdrawal Plan, in the article, will refer it with the abbreviation).

Systematic Withdrawal Plan

People have known about SIP from quite a few times, but today we are going to inform you about a new entity which is known as SWP of which full form we have been talking about. Talking about SWP, it is the reverse of what SIP is.  With SWP we withdraw a fixed amount every fixed interval of time from the fund. You can set any preset number and any preset frequency while taking up the plan. Hence you can select withdrawal terms as Monthly, quarterly or with annual rates.

This plan is quite a good choice for people who got a good amount from your provident fund, and now you are looking for some fixed income, and then you can invest the amount with the SWP scheme. Here you can simply put the amount, and fix an amount which is less than the return. Say 9% P.A., and you withdraw 7 – 8% P.A. then it can be quite a good one-time investment plans and will be funding you for more than your life time.

For most of the part, this keeps you covered. We have seen many such fixed income plans, but there are some inflation protection problems because needs increase with time and the growing expenditures can make them fall short. But SWP does protect you from it; it will be generating returns up with inflation especially if you opt for an equity fund type of thing.

So till now what exactly does SWP, Systematic Withdrawal Plan means might be clear to you, now let us move with what exactly does STP, Systematic Transfer Plan means.

Schematic Transfer Plan

As per the name suggests, this helps the customer to have a more secure and profitable form. This plan allows the user to invest the money in one or the other fund in lump sum amount and then on a fixed amount of time you can simply transfer a fixed amount into another scheme.

If the market is quite up and down very frequently, then STP helps the investor to be safe by transferring some funds from the source scheme to target scheme. There is two type of Systematic Transfer Plan which is fixed STP and capital appreciation STP. In fixed STP the investor periodically takes a fixed amount and transfer from one investment to another.

One of the most used forms is the capital appreciation STP where the investors are free to take some profit out of their previous investment and invest the capital into the other. Most of the people opt for the capital appreciation Systematic Transfer Plan.

Out of SIP, SWP, STP, the last one is the second most profitable and the most recommended investment strategy. On the first number there comes SIP which is the base of the other two strategies. While SIP and SWP might have some of the risks attached to it, STP comes to be the best risk mitigation technique in the market. Let us talk about some of the points which we must keep in mind while choosing STP.

  • You must choose STP only if you want to be on a safer side, most of the time such risk mitigation strategies also comes at a loss. It is nothing different with STP, this also comes with its own set of losses, and you are going to have a reduced return when the market is low.
  • For any investment, you have to be in discipline. You cannot only just sell the amount whenever you want. You have to keep it quite simple and have to follow it with the terms of the plan. Because if you are going to break STP due to some short moments in the market, where without research you say it will be a significant loss and sell it. Then it will inevitably result in some long term harm to your investment.
  • You cannot make any decision without understanding the situation. If you need to sell the assets, then you should not transfer money from one to another when the market is at its peak value and vice versa.

These are some of the points which you must keep in mind if you are investing into an STP plan, or have already invested.

Today we have got most of the confusions at least from the definition point of view regarding the Systematic Investment Plan, Systematic Withdrawal Plan, and Systematic Transfer plan. This will surely help you to decide on which plan you must take and if you should go for some specific plan or not. Do let us know in the comment section below if you are going for some specific plan and we did help in the same.