Difference Between STP vs SWP in Mutual Funds

In mutual fund investing, people encounter various plans tailored to help them manage their investments and achieve their financial goals. The popular options are Systematic Transfer Plans (STP) and Systematic Withdrawal Plans (SWP). They sound similar, but each plan has its purpose.

STPs are used to systematically transfer your investments into the market, whereas SWPs will enable investors to withdraw a fixed sum of money regularly from their investments. Let’s understand the difference between STP vs SWP in detail.

SWP (Systematic Withdrawal Plan) is a regular withdrawal of a fixed amount from your mutual fund investment. When you withdraw your money, you redeem your mutual fund units at the prevailing NAV. This means the amount you receive depends on the current NAV on the day of withdrawal.

You can withdraw these instalments until your investment corpus is fully redeemed. SWPs are ideal for individuals who have already collected a large corpus and want a steady income stream.

With SWP, you can regularly withdraw a fixed amount from your mutual fund, whether monthly, quarterly, or annually. Here is how it works:

• You invest your lump sum investment amount in a mutual fund scheme.
• You set up an SWP with your chosen amount and withdrawal frequency (monthly, quarterly, etc.).
• The mutual fund house will redeem the required units from your investment on the chosen date to fulfill the withdrawal amount.

STP (Systematic Transfer Plan) allows investors to shift funds from one mutual fund scheme to another. The fund containing the accumulated wealth is called the source or transfer fund, and the fund where the money goes is called the destination or target fund.

The same asset management company must offer both mutual fund schemes for a transfer. With STP, the investor can slowly transfer the funds from the high-risk equity mutual fund to a more stable debt fund.

How Does STP Work?

STP is a pre-programmed transfer between two funds within the same fund house. It works as:

• You must select two schemes: a source scheme and a target scheme.
• Decide on the amount and frequency you want to transfer regularly.
• The specified amount is automatically transferred from your source scheme to your target scheme on the chosen date.

A Systematic Withdrawal Plan (SWP) is a financial strategy commonly used to generate a steady income stream, especially for retirees and goal-oriented investors. It is ideal for individuals:

• Individuals looking for a regular source of a second income.
• Risk-averse investors can invest in moderate or low-risk profile mutual fund schemes.
• Investors without pension earnings want to create their own pension by investing in retirement corpus in schemes.
• The investors in the high tax bracket find SWP useful, as there is no TDS on the capital gains.

STPs can be a great choice for many investors, provided their financial goals and risk profiles align with the features and benefits of the STP investment strategy. Given below are the categories of individuals who should consider STP:

• Salaried individuals often have a regular income stream.
• Retirees who depend on their savings. They can ensure a reliable income source by transferring a fixed amount at short intervals.
• The investors are risk-averse and prefer to safeguard their capital.
• Investors with long-term investment goals can use STP by harnessing the power of compounding.
• STPS benefits those who seek tax-efficient strategies. The indexation benefit of capital gains leads to substantial tax savings.

Depending on your investing goals, you can choose either an STP (Systematic Transfer Plan) or an SWP (Systematic Withdrawal Plan).

• STP is a good option for investors with a lump sum of funds. It allows you to park your funds in a low-risk fund while systematically transferring and investing this money into a higher-risk (but higher-return) investment. This reduces market timing risk and ensures that you invest in a disciplined manner.
• SWP is designed for investors who need income to access the funds invested. SWP allows periodic withdrawals from the lump-sum investment. This withdrawal strategy is particularly useful for retirees or anyone who needs to access cash from an investment without being forced to redeem the entire amount.
• If your goal is to achieve capital growth through a phased investment, then STP is a suitable tool. If your goal is to achieve regular income with a constant return and liquidity, then SWP is the appropriate choice.

In conclusion, SWP and STP are investment strategies that offer different benefits. SWP facilitates periodic withdrawals, whereas STP offers systematic transfers between funds. Both serve unique financial needs. Choosing the right strategy will depend on individual investment goals and risk management.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.