If you are starting out your investing journey but confused with so many terms like SIP, STP, SWP and not able to decide what is the actual use case of them and how they are different?
Then be relaxed because today, we will go deep inside in all of them will see what’s the difference between SIP vs STP vs SWP and which is better for you for long term and short term.
So let’s get started!
Table of Contents
What is SIP? (Systematic Investment Plan)
Definition:
SIP, or Systematic Investment Plan, is a way through which you invest some amount regular from your bank account to any financial option usually a mutual fund with a long term horizon in order to build your wealth.
How It Works:
Just like you get a salary or income every month from your job but before getting your salary your company deducts some money in form of Employee Provident Fund (EPF) investment on which you get some interest and your money keeps compounding.
At the time of your retirement you get can withdraw this EPF investment.
A SIP also works very similarly to this where you invest some money today as low as ₹1000 every month in a mutual fund where your money keeps compounding without your physical involvement.
But in SIP you get the flexibility to withdraw your money anytime unlike a EPF.
Benefits of SIP:
- Regular Savings: It is a disciplined approach of investing to start working on building your wealth corpus from a very small start.
- Rupee Cost Averaging: Unlike investing all your money in shot, you keep investing some amount monthly due to which your chances of loosing the money is decreases and you don’t need to time the market for best returns, it automatically gets average out.
- Long-Term Growth: SIP always tend to perform best in long term because in short term markets can be volatile while in long term it always grow if the nation keeps growing.
Example:
If you invest ₹5,000 every month in an equity mutual fund through SIP, you benefit from market fluctuations and your investment grows over time.
What is STP? (Systematic Transfer Plan)
Definition:
STP, or Systematic Transfer Plan, is a way through which you transfer you investment from one scheme of any mutual fund to another scheme but on an regular basis like monthly.
How It Works:
Imagine if you were already investing some amount in equity mutual fund every month. But after sometime probably after 1 Year you were planning to buy a car, but as we know stock markets are very volatile in short term.
Hence, you thought to start transferring some amount regularly in form doing an STP from an equity based scheme to a debt based scheme of a same mutual fund (as fixed income mutual fund are less riskier) so that you can get both the safety of your money from volatility in debt funds and capital appreciation too on the rest money in equity based scheme.
Benefits of STP:
- Smooth Transition: With STP you can smoothly transition from one scheme into another while enjoying the benefit of both.
- Risk Management: Instead of investing your whole money in one short with STP you transfer some amount regularly that reduces the impact of market volatility by spreading investments over time and provide higher returns too.
- Flexibility: Unlike some financial option, with STP you get’s the complete flexibility to adjust your investments according to your changing financial goals in order to get the better and safe returns as market situation changes.
Example:
You invest ₹1,00,000 in a liquid fund and use STP to transfer ₹10,000 every month to an equity fund for a year. This strategy helps you manage risk while seeking higher returns.
What is SWP? (Systematic Withdrawal Plan)
Definition:
SWP, or Systematic Withdrawal Plan is a way to to generate a regular income by withdrawing some amount at regular intervals (monthly, or quarterly usually) from any mutual fund after initially investing a lumpsum amount.
How It Works:
Think of SWP or Systematic Withdrawal Plan as receiving a pay check from your investments without doing anything actively. In this way not only you receive a regular income but also your money you invested initially will keep compounding too so that even after withdrawing some amount your seed investment remain safe and keep growing.
To calculate how much money you can withdraw every month once after investing that also inflation adjusted, you can use our SWP Calculator With Inflation.
Benefits of SWP:
- Regular Income: SWP is a kind of regular income source for you on which you can trust that you will going to be paid on a particular date at regular intervals autmatically once you step it properly.
- Flexible Withdrawals: Unlike your salary that is fixed, SWP provides you complete flexibility of adjusting how much amount you need to withdraw & when will you withdraw. You can also change this anytime as per your wish.
- Continued Investment: Your remaining funds will continue to grow even as you withdraw money this way if you withdraw money carefully then a SWP investment can keep providing you a regular income for your whole life.
Example:
Imagine you just got retired and received a gratuity amount of ₹5,00,000. Thus, instead of doing a FD you have invested this ₹5,00,000 in an equity mutual fund and set up a SWP to withdraw ₹5,000 every month to cover living expenses or other needs. This way your money also keep growing and you keep on getting ₹5,000 every month as per your set up.
Comparing SIP vs STP vs SWP
SIP, STP, SWP all three are used for different purpose. Hence, before choosing between SIP vs STP vs SWP, you should consider your investment goal, so that you don’t have to struggle later on.
Here’s a quick comparison between SIP, STP, SWP to help you understand the differences:
| Feature | SIP | STP | SWP |
|---|---|---|---|
| Purpose | Regular investment | Regular transfer between funds | Regular withdrawal from funds |
| Frequency | Monthly, quarterly, or as chosen | Monthly, quarterly, or as chosen | Monthly, quarterly, or as chosen |
| Best For | Building wealth over time | Transitioning funds based on risk | Generating regular income |
| Tax Implications | Tax on each SIP redemption | Tax on each transfer from one fund | Tax on each withdrawal |
SIP vs STP vs SWP Which is Better for You?
Finally, the question arises, from SIP, STP, SWP which one is right for you if you wanted start investing from today.
While, all three serve different goals, so let’s checkout which one will be right for you and when you should switch from one to another.
- Choose SIP if you are getting a regular income from any income source and have a long term horizon of minimum 10 years to build your wealth corpus gradually starting even from a small SIP investment.
- Choose STP if you need to shift funds from safer investments to higher-risk investments smoothly.
- Choose SWP if you have some big amount sitting in your home or bank account that you wanted to invest to get a steady income from your investments instead of parking your money in any financial option for future wealth building only.
Final Words – SIP, STP, SWP
That’s all! Here is the complete guide for you on SIP vs STP vs SWP.
Choosing between SIP, STP, SWP depends on your investment goal.
All three are different ways that serve different purpose in your investing journey and build a wealth corpus.
Thus, no one is better or worse then another, while I recommend to maximise the return on your investment and if you wanted to generate a regular income too while investing then use a combination of all these three tools in your investing journey.
Disclaimer: The Honest American provides financial education, investing strategies, & stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
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