3 powerful mantras of investing in mutual funds: SIP, SWP and STP

As we know, investment is regulating one’s cash flow to get fruitful returns in the future. Depending on your financial goals, the right investment method will help create wealth.

An individual’s financial goal is set right by properly planning his/her financial transactions. Once the planning is done, only a systematic investment approach will help them achieve their goals.

What are those systematic ways to reap the benefits of your investment? These are the three mantras of investing in mutual funds.

1. SIP

2. STP

3. SWP

Let us discuss each in detail.

SIP

SIP is known as a systematic investment plan. To invest in a mutual fund through SIP an investor doesn’t need to have fundamental or technical knowledge of the market. He can invest regardless of how the market condition is. Let us understand SIP with an example.

If person A wishes to invest ₹5000 per month let us take two scenarios.

So through SIP one can buy a higher quantity of units when the market is down, while the value of investment increases when the market is in a rally. So, an SIP makes investing easy. The performance of the fund can also be tracked through one’s smartphone and he/she can build a huge corpus through the power of compounding.

STP

STP is known as a systematic transfer plan. STP allows an investor to transfer the investment from one mutual fund to another mutual fund. STP can be done between the same fund houses or from one fund house to another. Let us understand STP with an example.

If person A has initially invested ₹5,00,000 in an equity large-cap fund. We know that large-cap funds are less volatile and provide stability in investment.

If equity markets are facing a bearish run, then the investor can choose to transfer his investment from a large-cap equity fund to any of the debt funds till the equity market turns bullish.

This helps the investor generate returns from his existing large-cap fund and use the market conditions in his favour to avoid any losses and generate higher returns. On the other hand, if the market is bullish, the investor can return his investment to an equity fund to make use of the market conditions and maximize the profit.

SWP

SWP is known as a systematic withdrawal plan. SWP is the direct opposite of SIP as here the investor redeems a fixed amount through withdrawal at regular intervals.

For example, if a person invests ₹10,00,000 in a mutual fund, this helps him/her generate returns when the fund performs well and he/she can withdraw the returns or any amount of money needed regularly.

If an investor wishes to withdraw ₹5000 per month, the NAV of 1 unit is ₹20, then the AMC redeems ₹5000/20 = 250 units that month. The number of units redeemed changes depending on NAV at that point of redemption.

The advantages of SWP are that it provides regular income, can receive regular income postretirement, and can generate higher returns based on market conditions. Let's see how an SWP performs efficiently to enable monthly withdrawal in addition to providing a capital appreciation for the investors.

From the table, we can see various mutual funds. They vary based on equity, debt, and fixed instrument allocations. They cater to the needs of various investors based on their return and risk profiles. 

The return generated by investing in SWP is higher compared to any fixed-income instruments such as FDs. Thus, SWPs provide high capital appreciation in addition to a regular monthly withdrawal facility.

S Sridharan, Founder of Wealth Ladder Direct