Systematic investment plan (SIP), systematic transfer plan (STP) and systematic withdrawal plan (SWP) are methods of systematic investing and withdrawal in mutual funds. Let us look at the use cases of these methods.
Systematic investment plan (SIP)
You can use an SIP to invest small amounts of money over time to build a corpus. By spreading out investments over a period of time, they help investors average their purchase cost by investing at lows and highs of market. This prevents you from committing all your money at a market peak and hence maximises returns. SIPs also bring discipline to investing and make investing a habit.
You can invest in SIPs in multiple ways; you can do a monthly, weekly or daily SIP. Also, there are various 'types' of SIPs. For instance, a value SIP changes your SIP amount as per the expensiveness of the market. Though this option sounds good, tinkering with the basic idea of SIPs only makes it complex. You are better off sticking to an ordinary SIP, preferably on a monthly basis.
SIPs have limited use in debt schemes as they are not as volatile or risky as equity schemes.
Systematic transfer plan (STP)
Normally, one uses a STP when there is a lump sum to invest. An STP helps spread investments over a period of time to average the purchase cost and rule out the risk of getting into the market at its peak. With an STP, an investor can invest a lump sum in one scheme (mostly a debt scheme) and transfer a fixed amount regularly to another scheme (mostly an equity scheme).
The basic idea behind an STP is to earn a little extra on the lump sum while it is being deployed in equity. Debt funds excel over the normal savings bank account.
Depending on the lump-sum amount, the investor can decide the period over which he wants to deploy the money in the market. Typically, the larger the amount, the longer the time period.
An STP can be done from an equity fund to a debt fund as well. If you are saving for some important goal, like your child's education, buying a home or retirement and you are nearing your goal, don't wait till the target date. Begin moving your money from equity to debt well before the time when you need the money.
Systematic withdrawal plan (SWP)
An SWP allows you to withdraw a designated sum of money from a fund at regular intervals. Such a system is particularly suited to retirees, who are looking for a fixed flow of income.
SWPs provide the investor a certain level of protection from market instability and help avoid timing the market.