Systematic investment plan (SIP), systematic transfer plan (STP) and systematic withdrawal plan (SWP) are methods of systematic investing and withdrawal in mutual funds but many investors seem to be still unaware of the latter two.
What is an SIP?
An Systematic Investment Plan (SIP) is an option where you invest a fixed amount in a mutual fund scheme at regular intervals. For example, you can invest 1,000 in a mutual fund every month. It is a disciplined investment plan and helps reduces vulnerability to market fluctuations.
SIP investments can help you reach your financial goals by taking advantage of rupee cost averaging, and growing your investments with compounding benefits.
With mutual funds, your account will be automatically debited on the requested date to purchase the units of the required fund.
What is a Systematic Transfer Plan (STP)
Normally, one uses a STP when there is a lump sum to invest like when you have earned a substantial bonus but don’t want to do a lumpsum investment into equities straightaway. An STP helps spread investments over a period of time to average the purchase cost and rule out the risk of getting into the market at its peak.
An STP is a plan that allows investors to give consent to a mutual fund to periodically transfer a certain amount / switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house. Thus at regular intervals an amount/number of units you choose is transferred from one mutual fund scheme to another of your choice. This facility thus helps in deploying funds at regular intervals. Example, , you can transfer your money to a target equity fund while you are invested in a debt or liquid fund which is generating risk free returns instead of this money lying in your savings account. Therefore, you will get the returns of the equity fund you are transferring into and at the same time remain protected as a part of your investment remains in debt.
For example, if one has 50,000 to invest in equities; he can put the entire amount in a liquid plan and go for a monthly SIP of 5,000 in an equity plan through an STP.
An STP can be done from an equity fund to a debt fund as well. If you are saving for some important goal, like your child’s education, buying a home or retirement and you are nearing your goal, don’t wait till the target date. Begin moving your money from equity to debt well before the time when you need the money.
Do of course note that an STP can only be between schemes from the same mutual fund house.
A Systematic Transfer Plan is of three types; Fixed Amount STP, Capital Appreciation Only STP and Flexible Amount STP , which can be chosen depending on what the client prefers.
What is a Systematic Withdrawal Plan ?
An SWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals. It allows investors a certain level of independence from market instability and helps in avoiding market timing. The investor can reinvest the redeemed cash in another portfolio or use it as a source of regular income on a monthly or quarterly basis.
SWP is also available in two options: Fixed Withdrawal and Appreciation Withdrawal
This feature is similar to the endowment plans which provide cash inflows to investors are prefixed arrangements and periods.
Costs of SWP/STP
Do note down the exit load structure of the schemes that you are choosing to ensure there are no surprises.
STP: A Securities Transaction Tax (STT) will be levied at the time of exit i.e. from one equity scheme to a debt scheme, or even another equity mutual fund scheme (of the same fund house). However, for transfer from debt mutual fund schemes to equity oriented mutual fund scheme, STT is not levied.
SWP: Any gain on sale of equity mutual fund units held for less than 1 year attracts a Short-term Capital Gains Tax(STCGT) of 15% and long term at 10%. However, your withdrawals with SWP will be in a smaller amount and in the first year, it will be your principal amount. Hence, it may not attract STCGT in case you withdraw via SWP.
In case of debt funds, short-term is defined as 3 years and any profit made within this duration is classified as a Short Term Capital Gain (STCG) and will be taxed as per your income-tax bracket (i.e. marginal rate of taxation). And Long Term Capital Gain (LTCG) i.e. investments held for a period of more than 3 years, at 20% tax rate with indexation.
Contact us at email@example.com for more information on these and other options in mutual funds.