Explaining SIP plans, SWP plans and STP plans for mutual funds in detail


A Mutual fund Systematic Investment Plan (sip), Mutual fund Systematic Transfer Plan (stp) and Mutual fund Systematic Withdrawal Plan (swp) are different modes of investing into mutual funds.

It is a common misconception that these are various types of mutual funds but they are not, they are only the various methods by which you can invest in mutual funds.

All the three modes of investing in mutual funds have their own features, advantages and serve specific purposes.

What method you choose to invest via would then again be dependent on several factors like your age, goal, time horizon, etc. in short, your risk profile.

sip returns

Systematic Investment Plan

What is a SIP plan?

A sip plan in a mutual fund is a mode of investing via which you can make periodic investments into mutual funds if you do not or cannot make lumpsum investments.

The period could be:

  1. Daily
  2. Weekly
  3. Monthly


Which date is best for mutual fund SIP?

No matter what date you pick for your sip plan, it will make no difference to your overall mutual fund portfolio.

No one date is better than the rest and vice versa for a sip plan.

What is important is that you are disciplined with your sip plans and not what date you invest on.


How long does it take to start sip?

You need to register your sip plan at least a month before the desired date on which you want your first instalment to be deducted.

It takes 30 working days for a fresh sip plan to be registered in a particular mutual fund scheme.

Keep in mind that 30 days here mean 30 ‘working days’.

In the same manner, you also need to put in the application to stop your sip plans at least 30 working days before your next installment.


Are you investing in the right mutual funds?

What is minimum period for sip?

A sip plan in a mutual fund needs to be registered for a minimum period of 6 months.

The maximum differs from one mutual fund to another, some allow up to 3 years and some up to 5 years.

Most mutual funds generally allow the continue until stopped option.


What happens if you miss sip payment?

In case you miss one sip plan installment then the sip plan would not be deducted for that one month but would continue as usual from the next month.

You would not be penalized for missing a sip plan installment but your may bank may fine you for the same, this varies from bank to bank.

In case you miss 3 sip plan installments on the trot then your sip plan ceases automatically.


Does sip have a lock in period?

No, sip plans do not have a lock in period except for tax saving elss mutual funds.

You can stop and redeem your investment as and when you desire.

You will have to pay exit load of 1% in case you redeem your sip plan installment before it completes 1 year however.

Only in the case of a tax saving elss mutual fund, each sip installment would be locked in for a period of 3 years from the date of investment.


Additional reading: Click Here to read our complete report on everything that you should know about a Mutual fund NAV.


What happens when sip expires?

When a sip plan in a mutual fund expires, the investment amount stays in the same fund as it is.

Of course, the market movements from time to time do affect its valuation.

The investment amount is not automatically credited back to your bank account until and unless you redeem your investments.


Is sip in mutual fund tax free?

Every mutual fund investment, be it equity or debt, sip or lumpsum or stp attracts a stamp duty of 0.005% from 1st July 2020 onwards.

This will also be applicable on sip plans registered before 1st July 2020.

If you are a long - term investors (ideally should be) then this would not affect your mutual fund investment much.

You would need to pay short term capital gains tax in equity funds for units that have not completed 12 months and in debt mutual funds for units that have not completed 36 months.

For period of more than 12 months in equity mutual funds and 36 months in debt mutual funds, you would need to pay long term capital gains tax.


Can I stop sip for a few months?

Yes, you can stop your sip plans for a few months.

Most mutual fund houses provide the option of pausing sip plans for a period of upto 3 months.

Ideally it is better to pause than to stop your sips completely or else when you start again, you would need to register fresh sips.

It’s better to pause and restart than to stop and register fresh sip plans.


Can I stop sip without redeeming?

Yes, you can stop your sip plans without redeeming the accumulated amount.

The accumulated amount will stay in your mutual fund until and unless you redeem it.


Sip plans advantages

A sip plan in a mutual fund helps you:

  1. Stay disciplined
  2. Invest small amount gradually
  3. Average your investments
  4. Not worry about timing the market.

Additional reading: Click Here to read more about what are Flexi Cap Mutual Funds


Systematic Withdrawal Plan

What is swp in mutual fund?

A systematic withdrawal plan in a mutual fund is a plan which allows you to withdraw a specific amount at regular intervals.

A systematic withdrawal plan in a mutual fund is somewhat the opposite of a sip plan, in a sip plan you can invest on a monthly basis whereas in a systematic withdrawal plan you can withdraw on a monthly basis.


How do I start a mutual fund swp?

Step 1

Invest a lumpsum amount in the mutual fund scheme of your choice for a minimum period of 3-5 years.

The longer the better as is the case with any equity mutual fund.

You can increase or add to the initial lumpsum investment amount as and when you wish to.

Step 2

Based on your income requirement you would need to decide on

  1. Date of withdrawal
  2. Amount of withdrawal
  3. Frequency of withdrawal
  4. End date of withdrawal


Sip returns

How does swp work in mutual funds?

In a systematic withdrawal plan you first need to either make a lumpsum or do a sip plan for as long as possible.

Let the lumpsum amount or accumulated sip investment amount stay invested for as long as possible.

Once the invested amount grows to a certain figure you can make monthly withdrawals.

This makes sure you do not need to time the market and also works as a cushion against market volatility.


Are you investing in the right mutual funds?

Is swp tax free?

No, a systematic withdrawal plan in mutual fund is not tax free.

A systematic withdrawal plan is basically redemption.

You would need to pay short term capital gains tax in equity funds for units that have not completed 12 months and in debt mutual funds for units that have not completed 36 months.

If the swp includes a unit that has not completed a year then an exit load of 1% would also be imposed.


Systematic Withdrawal plan Advantages

Dividend distribution tax has now been abolished, earlier dividend received by you was tax free since it was paid by the mutual fund house.

Now you have to pay tax on dividends received.

The higher the tax bracket, the worse it gets.

You end up almost half your income from dividends as taxes as you go higher up the tax bracket.

There is also no guarantee that the mutual fund will declare dividend unlike a systematic withdrawal plan.


Systematic Transfer Plan

A Stp in mutual fund is a mode of investing in which you make a lumpsum investment in a debt or liquid fund.

You transfer a portion of this lumpsum investment (debt or liquid) into your primary equity fund either daily, weekly or monthly.

The primary purpose of this exercise is so you do not invest your entire investment into primary equity fund in one go.

This is all the more important if you feel the market is overvalued or is currently going through a very bearish phase.

It also helps during a volatile market so you get to average your investments.

The kind of debt or liquid mutual fund you make the primary lumpsum investment in would depend upon the duration of your STP plan since each debt fund varies with respect to their exit loads.


STP plan Advantages

It helps to average your investments.

You do not have to worry about timing the market.

A STP plan is all the more important if you want to invest into more volatile funds like say mid and small cap funds when they are already running high.


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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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