Mastering SIP, SWP, and STP Strategy: Unlock Your Wealth Potential for Optimal Investment Returns

SIP – Systematic Investment Plan

A Systematic Investment Plan (SIP) is a method of investing a certain amount regularly in Mutual Funds. It’s a disciplined approach to investing, offering a convenient way for investors to build wealth gradually, benefit from rupee cost averaging, and harness the potential of compounding over the long term.

We need to choose a particular date of the month, how long we are going to invest and a fixed amount that should get debited from our bank account and get invested in the chosen scheme. Through SIP investments, we purchase some units of the scheme at current NAV (price per unit). This is considered as one of the best personal financial tool.

Locking Period (Important to Know) : ELSS (Equity Linked Saving Scheme) or Tax Saver Fund comes with 3 Year Locking Period. In that case, number of units that you buy in each SIP transaction, will remain locked for 3 years. Once upon a time, a client started SIP in Tax Saver Fund for 80C benefits, he was well aware of 3 Years Locking. Started from Apr’10 for 3Yrs ie till Mar’13. In Apr’13, he called me to take out all the Money as 3 Year completed. It was really a tough time to explain the locking period concept in SIP that time. I tried unsuccessfully that every buy (of Unit) has to complete 3 yrs. to redeem the money.

Step-up SIP: SIP can be topped-up i.e. instalment amount can be increased after every 6 or 12 months. This is a very powerful and practical feature of SIP investment that not many investors exercise. This way a goal can be achieved with less strain on your pocket at start. Every Year whether Salaried or in business, if income is getting increased (say by 10%), proportionally SIP value must be increased to build sizeable wealth in lesser possible time.

Normal SIP Vs Step-UP SIP

Aryan and Dharma both started SIP of 5K per month. Aryan continued the same amount for next 20Yrs, whereas Dharma keep increasing it by 5% Yearly with income increment. Use SIP Calculator

Aryan Final value after 20 Years:

• • Invested Value = 12L || Estimated Return = 63.79L || Total Value = 75.79L

Dharma Final Value After 20 Years:

• • Invested Value = 19.83L || Estimated Return = 80.45L || Total Value = 1.01 Cr

Compounding is a powerful process, try to get its benefit as much as possible.

Let understand the power of Compounding with example ( Invest Early, Earn More. )

Mohan and Sohail both wanted to invest 12 L in 10yrs and enjoy its benefits after 10Yrs

Mohan opted to invest 10K Per month for 10 Years (Consider 15% return), the Value after 10 Years –

• Invested Value = 12L || Estimated Return = 15.86L || Total Value = 27.86L

Sohail opted to invest 20K Per Month, goes for 5Yrs SIP to invest 12L.

• Invested Value = 12L || Estimated Return (in 5Yrs) = 5.93L
• Now, SIP has stopped at 5th Yr, and total value 12+ 5.93 = 15.93L
• The value will be in MF for next 5 Years. || Total Value = 32.04L

Equal Amount invested for Same duration and difference in final Value is more than 4L Rs. This is the Power of Compounding. Invest Early, Earn More. Also note that SIP is just not about investing into Mutual fund but this process can be followed across various investment instruments like gold Bond (SGB), Stocks ( BEL, Jio financial, Bajaj Finserve, IDFC Firstbank etc..)

SWP – Systematic Withdrawal Plan

A Systematic Withdrawal Plan (SWP) is a method of withdrawing a certain amount regularly in Mutual Funds.

We need to choose a particular date of the month, how long we are going to withdraw and a fixed amount that should get credited to our bank account and get redeemed from the chosen scheme. This will go on till the time your fund lasts or the mentioned fixed tenure – whichever is earlier.

This withdrawal could be made on an annual, semi-annual, quarterly, or even monthly basis. It’s quite the opposite of a Systematic Investment Plan (SIP). In an SIP, you channel your bank account savings into the preferred mutual fund scheme. Whereas in an SWP, you direct your investments from your mutual fund plan to your savings bank account.

Like step-up SIP, Step-up SWP can be achieved. it makes perfect sense, that your withdrawal amount does not remain fixed, and you get to withdraw slightly larger amount after every 12 months to support the increased household and lifestyle expenses for instance in align with inflation.

Taxation in SWP: Important to know that the entire withdrawal amount from SWP is not taxed but only the resultant capital gain part.lets understand with an example.
In every withdrawal, you redeem some number of units, say “N”. Now, these N number of units have purchase NAV (X ) and sale NAV (Y).

Capital Gain Formula is – Number of Units Redeemed * (Sale NAV – Purchase NAV)

Cap-Gain = N* (Y-X)

Soon will provide link for taxation on Capital gain here.

SWP Usage and it benefit: There are various benefits and applicable in multiple scenarios.

• If one retires, this work like an annuity pension (Risk should be assessed and meticulously planned) plan.
• If Parents has invested in SIP for their Kids for longer time, the SWP is right way to finance the higher education expenses.

Note that SWP is not like Postoffice MIS or Annuity Pension fund with almost no Risk. This is associated with huge Equity Volatility risk in align with where the investment is. Always consult financial advisor and keep this in check with volatility in the Market.

STP – Systematic Transfer Plan

STP stands for Systematic Transfer Plan. It is a plan that allows investors to invest a lump sum amount in one scheme and regularly transfer a pre-defined amount into another scheme.

Suppose you are not feeling that confident in investing a large lump-sum amount of money into an equity scheme at a go. Instead, you want to get it invested within, say, next 12 months’ time in a systematic manner while earning interest on the not-invested money higher than the savings bank account.

To make STP work, you need to invest (or put) your money first into a liquid scheme of the same mutual fund house whose equity scheme you have chosen as the final destination of your money. Thereafter based on your given instruction, a fixed amount of money will get invested into that equity scheme from the liquid fund where you have parked your money into, every month in a particular date or at whatever chosen frequency.

STP work best when market keeps on tanking from your date of investment. Thereby, you keep on buying larger sum of units with the same investment amount. Or in other words, it you are feeling bearish about the market in near term or expecting huge volatility, then STP could be the right choice. Otherwise not.

Dont get confused in deciding SIP vs STP