SIP, SWP and STP

The three systematic plans turn good intentions into automatic behaviour, which is why they matter so much in ongoing service, and why the exam keeps returning to them.

A SIP, the Systematic Investment Plan, invests a fixed amount at regular intervals. Its quiet power is rupee-cost averaging: the same sum buys more units when prices are low and fewer when they are high, so the average cost smooths out and the investor is spared the impossible job of timing the market. A SIP can start fresh or feed an existing folio, is usually funded by NACH, a standing instruction or a One-Time Mandate, and can be grown over time with a SIP Top-Up (a periodic increase by a fixed amount or a percentage). One detail to remember: a minor’s SIP runs only until the minor turns 18.

The mirror image is the SWP, the Systematic Withdrawal Plan, which redeems a fixed amount at set intervals, ideal for a retiree who wants a monthly income without selling everything in one go at a market low. The STP, the Systematic Transfer Plan, combines both ideas: it is a SWP out of a source scheme and a SIP into a target scheme of the same fund house, the classic use being to move a lump sum from a debt fund into equity in measured steps. Two exam points ride on the STP. First, each transfer is a redemption from the source, so exit loads and capital-gains tax can apply. Second, and counter-intuitively, the scheme’s minimum investment and redemption limits do not apply to an STP. Finally, keep the vocabulary straight: a single transfer between schemes is a switch; a series of them is an STP.