When it comes to mutual fund investing it is crucial that any investor firstly understands what is Systematic Investment Plan (SIP) and also should be knowing what is Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP).
While most people are aware what SIP is, majority are not aware of what STP and SWP is. It is important that investors understand what STP and SWP is as the same can form an important element of financial planning.
SIP is a periodical investment of a fixed amount in a pre-defined mutual fund scheme, where the money gets debited from the bank account. The money debited is used to buy MF units.
STP is nothing but a transfer of funds from one mutual fund scheme to another, and is ideal for an investor when he or she is just a few years away from the ultimate financial goal. It is often seen that STP as a practice is used during market volatility. For example, when an investor is convinced that equity valuations are stretched and equity markets may turn negative, the funds can be transferred from equity mutual fund schemes to the debt or income mutual fund schemes.
Investors should however note that it may attract short term or long term capital gains tax, depending on the transaction.
SWP on the other hand is a fixed periodical redemption of a mutual fund scheme. In any standard SWP transaction the fund house will sell the MF units, and credit the money back into the bank account of the investor.
SWP is normally adopted by the investors looking for retirement solutions. Occasionally the SWP method is used to fund goals as well. Again, any SWP transaction may attract short term or long- term capital gains tax, depending on the transaction