Of recent mutual funds have become the talk of the town as the growth and the returns of investing in mutual funds are far better than keeping your extra money in banks savings account or in FDs. Though the returns of a mutual fund are more than keeping the same amount in a bank but most of the times it is less than investing directly in shares and stocks. Most of us are unable to invest directly in the share market because of the lack of time and knowledge. So, for the people like us who are lacking time or knowledge for investing can invest their money in share market through a mutual fund company.

It is true that investing through a mutual fund is simpler than investing directly in stocks but to invest in mutual funds also you are going to need an ample quantity of mutual fund information. Often the agents selling mutual funds uses jargons which we are unaware of and things seem to be complicated. Today we are going to break down the meaning of the three most used terms of mutual funds which are- SIP, STP and SWP.

The Basics of Mutual Funds

Every individual who is interested in investing and had a study on how to invest in mutual funds must have come across those terms and had a halt in understanding the meaning of the same. All these three are the systematic investment and withdrawal plan of mutual fund which indicated the financial discipline of the investor. Today we have brought everything about these three plans including the benefits and the taxability.

What is a SIP?

The abbreviation SIP stands for ‘Systematic Investment Plan’. As the name suggests with a SIP plan, the investor invests a fixed amount of money at a pre-defined time intervals over a period of time in a systematic way. The investment in mutual funds with a SIP can be done in daily, weekly, monthly, quarterly, half-yearly or yearly basis. If you invest in SIP, you don’t need to keep an eye on market fluctuations and can invest without any worry. Investing regularly for a long-term has a good impact and it will be reflected in your returns, as the risk factor gets balanced out with a regular fixed investment. A SIP is just like a recurring deposit which makes you deposit money on a prefixed date and the AMC will buy units on the day when you will deposit the money.

SIP! Your Best Investment Plan

What is a SWP?

The full form of SWP is ‘Systematic Withdrawal Plan‘. Such plans allow the investor to withdraw a specific amount of money at regular intervals. This plan works perfectly for the retired ones who can invest a good lump sum amount in mutual funds and want to have a regular withdrawal which will help them financially. Sometimes withdraws are even done to invest in other funds too. Once you invest a lump sum amount, you can set the amount and the frequency when you are going to withdraw from the fund. SWPs are even useful in getting protection from market volatility.

What is STP?

The STP stands for ‘Systematic Transfer Plans’. This type of plan allows the fund manager to transfer schemes from one fund to another fund with the knowledge of the investor. Mutual funds are always a subject to market risk and every investor should keep this in mind while investing in mutual funds. The STP is the plan which can be used as a safeguard of market volatiles. Whenever the fund manager feels that the investment which he made in equity is at a risk, he can transfer it to debt oriented schemes. Once the turbulence comes down, he can transfer the funds back to equity during times of growth. When your investment is big, the STP duration also automatically increases.


Now Let’s Come to the Taxation Rules of All Three Plans

When you invest in SIP mutual fund, you will be enjoying the tax exemption on the whole investment. You are going to accumulate wealth as well as the exit load for this type of fund is ‘Zero’

Let’s say, you have invested in SWP and withdrawn money before completion of 1 year, you will have to pay tax as per your tax slab. If the withdrawal happens after one year the tax deduction will be 10% with indexation and 20% without indexation.  

The investment in STP also taxable. If you move your funds from debt to equity within one year of investing, you will have to pay tax as per your tax slab.

Mutual Funds are a great investment channel to grow your wealth over a given period of time, with lower risks and higher returns. The systematic arrangement of investment and withdrawal helps to develop a financial discipline and systematic planning of wealth so that there is always room for the desired investments, expenses, and savings in life. Mutual Funds apart from just being an investment also acts as a support when they start repaying over the years, which can be a great help to fight the ever-increasing inflation. A little investment today will come back as big returns a few years later at a time when you would be needing it the most!