SIP, STP and SWP- the Jargons in Mutual Funds Explained

What makes young people averse to investing in Mutual Funds? The first thing got to be the fact that they don’t understand a word these investment gurus are saying over the TV talk show, or investment sites, or in newspapers.

Unexplained jargons used by mutual fund agents are to be blamed for this. Here are three short forms most beginners may not be familiar with while investing in a mutual fund; SIP, SWP, STP.

To start with, SIP, SWP and STP are abbreviations of Systematic Investment Plan, Systematic Withdrawal Plan and Systematic Transfer Plan respectively. These plans are offered by Mutual Funds. From the names it is obvious that these apply to investment, withdrawal and transfer of funds.

What are SIP, SWP and STP?

However, let us go deeper to get a bigger picture of each of these plans.

Systematic Investment Plan (SIP): This is an investment option in which you invest an amount regularly to a fund. The amount can be as small as Rs. 500 or even higher depending upon your ability to contribute to it. It is a highly successful investment plan especially for small investors who cannot put in huge amounts at a time.

Besides SIP helps in taking advantage of Rupee cost averaging. When markets go down your fund manager can buy shares of a company at lower prices. If you had invested lump sum and bought the shares at one go, then you would not have profited when the prices went down.

Systematic Withdrawal Plan (SWP): You can withdraw money regularly from a mutual fund in the same way as you invest in it through SIP. This is known as Systematic Withdrawal Plan. You can use it to liquidate your money for immediate expenses or you can re-invest it in another Mutual fund plan. This helps you to get a regular income every month.

Systematic Transfer Plan (STP): This is an option to transfer an amount of fund regularly from Mutual Fund to another account which might be investing in low risk debt instruments or in high risk equities. According to the market you can choose which fund to transfer your funds.

If the market is high enough and you fear a correction in the near future, you can transfer your amount systematically from high risk equities to low risk debt instruments.

Choosing Which Method to Opt for

To make the best out of your funds you must know when to opt for these plans.

If you do not have a lump sum amount to invest, you can opt for SIP and build up a corpus in the long term. With compounding interest you can increase your funds exponentially using SIP.

After you have made your gains through investing in mutual funds you need to withdraw your funds for expenses. For that you can opt for SWP. The fund is not withdrawn all at once, but regularly and systematically. This helps in using the funds effectively for expenses or re-investment. However for a lump sum expense, make sure you start withdrawal at an earlier date much before you need it.

SWP can also be used as a regular source of income. There are options to withdraw only the profits made with fund you have invested. The principal amount is not withdrawn but is kept invested in the fund to make a regular flow of income.

There are times when the markets are risky and headed for a crash. If your investments are in high risk in equities, it is time you shifted it to low risk debt instruments or else you will loose your investments. This is when you can opt for STP, which will regularly transfer your amount to safer instruments. Conversely, if the market is expected to boom then you can transfer your funds invested in low risk debt instruments to equities and profit from a bull market.

Now that you are familiar with these jargons, you can approach confidently up to an agent and invest in Mutual funds to get the best out of what you have earned.