Insights

Are You Using the SWP, STP Options Wisely?

February 7, 2014 . Vidya Bala

Systematic investment plan may now be a term that most mutual fund investors may be familiar with. But other jargons such as systematic withdrawal plan or systematic transfer plan are not often fully understood or used in the right ways by some investors.

Let’s take a look at when to use such plans and what factors you need to consider before opting for these methods of investing.

Systematic withdrawal plan

Some investors have a lump sum in hand and ask us for funds that would give them regular income. While opting for dividend payouts in debt funds can provide some cash flows, they can neither be fixed payouts nor can they be expected to be regular.

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swp

Hence, a person dependent on the fund for their primary income may not be doing the right thing in choosing dividend payouts. This is when systematic withdrawal plans serve the purpose. Systematic withdrawal plans suit investors who want to get a regular and fixed cash flow from their investment.

In other words, it helps create your own annuity. You can fix the sum you want to withdraw on a monthly basis from the fund. But there are a few factors you need to keep in mind while opting for this:

Have a sizeable corpus: You should have a reasonable amount that will allow you to do a regular withdrawal over the time frame you need. There is little point in investing and starting withdrawal the very next month. For one, if you do not allow your investment to stay for at least 1 year, you will end up incurring short-term gain capital gains.

Two, it helps if you allow your money to make returns as a lump sum before you start withdrawing it. Hence, as far as possible try to plan a bit ahead and invest when you know you will start requiring regular sums, say in a year or two.

Exit load: Even if you decide to withdraw before a year, check if you end up paying exit loads. While liquid funds will not have exit loads, others may have for withdrawals made soon after investing. You may not wish to incur this unnecessarily, besides capital gains.

Tax implication: Systematic withdrawal is no different from selling your units. That means each withdrawal is essentially a sale. Note that, with debt funds, withdrawals after a year will still incur capital gains. But since you will enjoy indexation benefit, it is likely that you will pay lower or nil tax based on the indexed cost.

Systematic transfer plan

stp

Systematic transfer plan or STP helps you to do a regular transfer from one scheme to another, mostly from a debt fund to an equity scheme within the fund house. Here again you will do well to know how you can put this facility to proper use:

–          STP is ideal if you have a large sum to be invested for the long term in equity funds. STP allows you to do an SIP – only the money goes from a debt fund (typically a liquid fund) to an equity scheme, instead of money moving from your savings account to your equity scheme, in case of an SIP.

–          STP makes sense when you want a sizeable corpus to earn more returns than your savings account, even as you deploy them gradually in the market.

–          STP is also a good tool to use when you want to gradually shift money from higher risk asset classes like equity funds to lower risk avenues like debt funds. Typically, as you near your goal, you may choose STP to make this gradual shift.

But you will do well to remember these points when you opt for a STP:

–          If you do not have a sizeable amount (say a few lakhs), you might as well do an SIP from your savings account; because there is little point investing in a debt fund and incurring capital gains every time you transfer, when the amount involved is not high.

–          As discussed for SWP, STP too involves sale of the fund you are moving out of. So capital gains taxes, for debt funds, will be incurred. You also need to check for exit loads.

–          Also, remember STPs can be done only within the same fund house. Hence choose the appropriate fund in which you will be initially investing and the fund you will be transferring the money later, after some groundwork; or check with your advisor.

At FundsIndia, we make SWP and STP a hassle-free process with no paper work; simply done with a couple of clicks. Seek our advisor’s help if you need funds that fit your above requirements.

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32 thoughts on “Are You Using the SWP, STP Options Wisely?

  1. Great article.

    I am currently parking money in Templeton India Treasury Management Account – Growth which is a liquid fund.
    My plan is to do a monthly STP towards:
    International Equity funds (considered as debt from taxation perspective)
    1. Franklin Asian Equity Fund – Growth (Rs. 10000 per month, 6 installments)
    2. FT India Feeder – Franklin U.S. Opportunities Fund(G) (Rs. 1000 per month, 6 installments)

    My requirement is that I cannot keep money in my savings account since the interest accrued is already more than Rs. 10000 across all savings accounts.

    I don’t mind paying tax on the returns from the debt funds when I exit the fund partially or completely by end of 2014.

    Is that the right approach?

    1. Hi Sunil, Think I misunderstood your question initially. You may do an STP to the intl. funds but ideally for an averaging to work, 6 months is too short a time frame. While we normally recommend a 3-year SIP, for intl. funds, perhaps at least 1 year is ideal. thanks,

      1. Hi,
        Is it ok to do STP from liquid fund to Equity in six months ?? or I have to make this also in 1 yr + .. You can check my portfolio ( FP done by Fundsindia )
        Thanks,
        Seenivasan

        1. hello Sir, STP from a liquid fund is ok in your case since the amoutn of surplus is high..better off keeping in liquid fund and transferring then keeping savings account. thanks, Vidya

          1. Thanks Vidhya,

            My question was 6 moths STP or 1 year STP will be good in my case ?? Just wanted to know your opinion .
            Thanks,
            Seenivasan

          2. Hello Seenivasan, It depends on whether you will continue to average after your STP is over (through SIPs). If you are going to do a 6-month STP, then you should ideally do an SIP after that as cost averaging has to be done for a longer period to reap its benefits. A short STP makes more sense if you are transferring to a debt fund at best. Given that the ‘in’ fund is equity, the longer the better. thanks.

          3. Thanks for taking time to answer . I am using STP only for lumpsum investments. In One of my portfolio will be invested for next 10 years as it is for Higher education and will be rebalancing as FP suggestion by Fundsindia. ( NO SIP from next year) and in My retirement portfolio will use STP for lumpsum and SIP every month for next 8-10 years.

            Thanks,
            Seenivasan

  2. Edit: The investment in
    2. FT India Feeder – Franklin U.S. Opportunities Fund(G)

    will also be Rs. 10000 per month (there was a typo in the earlier post.

  3. I want to invest lump sum amount in liquid fund and then STP for two years and thereafter SIP
    for 10 or more years please suggest me funds to be opted.

    1. Sir, portfolio suggestions will be given if you are a FundsIndia investor and route your query through your FundsIndia account (in the help tab, under advisor appointment). The blog is a general discussion forum. thanks, Vidya

  4. I have 10 lakh , that I invested in icici flexible income daily devident short term depth fund, that I want to shift that money in equity mf in 2 year , those depth fund is best for that or any change in depth fund or my statergy .
    Thanks
    Nitin

    1. Hello Nitin, We do not provide specific portfolio advice through the blog. If you are a FundsIndia account holder, kindly write to us using the advisor appointment feature under help tab in your account. The blog is more of a general discussion forum. Vidya

    1. Hello Sir, SWP or systematic withdrawal plan is a way to regularly withdraw money from your MF by selling part units every month. You can decide the sum yourself and not dependent on the fund house to declare it. MIP or monthly income plans are debt-oriented funds that seek to generate income from debt instruments and also gain from capital appreciation. The dividend option from such schemes seek to provide regular dividends but the amounts may vary and no guarantee. Income funds are a class of debt funds that invest in debt instruments such as corporate bonds, commercial papers, deposits and even govt. securities. They also seek to gain from the interest income of these instruments and also from any price appreciation in these instruments. They do not assure you any regular income. If you wish to generate regular income, the best you can do is invest in a debt fund, hold it for a year or two and then withdraw systematically and generate your own fixed income without any uncertainty. Thanks, Vidya

  5. Dear sir I plan to invest 50 lac in 5 equity mutual funds (10 lac each) and do swp of Rs.5000 monthly from each fund after 1 yr. I am 50 yrs old own house with no other income.I have to live the rest of my life on these investment.Kindly advise me on whether it is prudent

    1. Hello Sir, Equity funds can be very high risk options for 1 year and when you are looking at it solely for income purposes. Equity funds are only for 5-year plus time frames and that too for holding without disturbing it. What if you lost your capital in 1 year? Will it not affect your income generation?

      Please use ultra short-term debt funds or short-term debt funds for your purpose. Kindly avoid equity entirely.

      thanks, Vidya

  6. Hi Vidya,

    I have some money invested in Equity and have reached my target for a specific goal. Now the goal is 6 months away. What is a good option?

    1) Move the entire amount into Debt via STP as the target has been reached or

    2) Move it slowly over the period of 6 months so that any further upside in equity can be realized while minimizing the downside (but possibility of downside nonetheless)

    Thanks

    1. Hello Sir,

      If your goal is just six months away, you can move in one shot. If it is a longer period then STP will help you capture upside of equity. thanks, Vidya

      1. Hi Vidya

        I am looking to invest in SWP to get a regular income to take care of my EMI ,basically i have dumped my outstanding balance in SBI Maxgain , so technically i don’t need to pay EMI for rest of the loan period.

        But i realised that the amount i dumped is going to vanish at the end of the tenure and realized that SWP can help to take care of my EMI and there is a chance that my fund will grow too – i am planning to put that across multiple debt funds . The catch is i need to start withdrawl right after 1st month of investment.

        Any thoughts and any recommendations on the funds to look in to .

        Thanks
        Vamsi

        1. Hello Sir,

          Please go with ultra short-term and liquid funds. The other categories of liquid funds will carry some risks and may not meet your monthly commitments without some volatility. I will be able to make fund specific recommendations. If you are a FundsIndia investor, please write to us through your account. thanks, Vidya

  7. Hi, Can you pls tell me what is the difference between STP and SIP ? Suppose If I want to receive 15,000/- every month for another 15 years, without paying too much of tax should I do SWP Does the monthly withdrawal get affected by the performance of the MF ? If I do that in FD I lose much of the earnings in paying the taxes/Inflation.

  8. Dear Vidya

    Read thru your article.. I need your advise on STP investment investing and I hope you will be kind enough to suggest.

    -I’m 35 and have managed to create a saving of Rs.39 lacs thru my 15 years of career work savings in total which is not invested anywhere.
    -I have invested Rs.4.5 lacs (45000 each in the below 10 MFs)
    Birla SL Frontline Equity – Growth, Birla SL Top 100 – Dividend, DSPBR Focus 25 – Dividend, DSPBR Focus 25 – Growth, DSPBR Micro Cap Reg – Growth, Franklin India Smaller Companies – Growth, HDFC Balanced – Growth, HDFC Mid – Cap Opportunities – Growth, ICICI Pru Value Discovery Reg – G and Kotak Select Focus Reg – Growth
    -I have also invested Rs.6 lacs in FD (in Shriram transprt) due for maturity in march 2018.
    -My goal is to attain yearly returns of 4-5Lakhs P.A to meet my expenses, with low risk so that it will be my back up esp when i’m not employed after 2 yrs (planning to be self employed)

    – Considering this,can you kindly suggest:
    1. Since I have 39 L available, is it a good idea to invest say 7 lacs each in 5-6 liquid funds and then do a monthly STP to equity funds?

    2. If its a good idea am thinking of going for the below equity funds
    Birla Frontline Equity fund direct (large cap)
    HDFC Mid-Cap Opportunities Fund Direct Growth (mid cap)
    Franklin Prima plus fund/or Franklin India Smaller co fund (small cap)
    DSP Focussed 25 Fund Direct Growth
    IDFC Classic Equity Fund Direct Growth
    ICICI Value discovery (Diversified)
    and Axis Long term quity (ELSS)

    Can you pls suggest your mix of 5-6 equity funds?

    3. Also I understand that gains out of Liquid funds are taxable as I would do STP. I came across an interesting Liquid fund – HDFC Cash management Fund Treasury Advantage Plan – daily Dividend Reinvestment. While this fund’s returns are almost like a liquid fund, its dividend doesn’t attract a 28.3% DDT. DDT in this fund is just 15% .. So can this be a good liquid scheme to consider to put my funds?
    Can you also suggest some other similar liquid funds where there is lesser DDT?

    4. Or instead of investing the lump sum in liquid funds, can I invest in some regular debt funds and define STPs from there to equity funds? Is that permissable?
    If so can you suggest some good debt funds?

    Thank you
    Vivek

    1. Hello Sir,

      My apologies for the delayed response.

      1. Yes, STP is a good option.
      2. I will be unable to provide fund-specific advice. If you hold a fundsIndia account, please write to us and we’ll be able to respond through that.
      3. No liquid or debt fund has 15% DDT. That was an older tax rate. They all suffer 28.3% now.
      4. You can do STP from other debt fund to equity funds..but liquid fund is the safer option and some categories of debt funds have exit load and are also volatile. You should avoid such volatility merely for parking money and switching. Hence liquid fund is a prudent option for STPs.

      thanks, Vidya

  9. Hi,
    I think combine use of STP and SWP /MIP may increase earning yield. Actually STP and SWP have their limitations and if we use these tools together it can negate the shortcomings of these investment options and increase earning yield substantially.

  10. Hi Vidya!
    Till now, all through i have invested in Bank FDs, although the returns are low. However, now as i am nearing retirement (3 yrs left) i am thinking of gradually investing a part of my savings from FDs to Balanced MFs, opting for MIP, growth option and would like to withdraw systematically (through SWP option) after 2 – 3 yrs.
    Pls guide me how to get maximum monthly returns from SWP without consuming the principle invested amount. how it works and what are the tax implications on the withdrawals. i heard it is possible to keep withdrawing monthly and still the principle can keep growing.
    Request you to pls throw some more light on this.

    1. Hello Sir, Sorry for the delayed reply. The thumbule is to withdraw using SWP in such a way that you do not dig into your capital. For example if the returns from a certain fund can be expected to be 8-9%, then your annual withdrawal should not exceed 8% or in other words should be about 0.6% each month. That way you will ensure your capital remains intact and grows. SWPs are best done in debt funds where volatility is lower than equity-oriented funds. thanks, Vidya

  11. I plan to invest 5L through STP. I was considering a Balanced fund as the initial source fund. The reason being, I can take risk, I don’t incurr 28% DDT, I don’t have to worry about filing capital gains tax. The transfer from the Balanced fund will be to chosen Equity oriented funds (2-3 funds) in a span of 6 months. Is there any flaw in this scheme?

    1. Hello,

      Using a balanced fund for STP purposes – in 6 months at that – doesn’t serve the purpose of the STP at all. While balanced funds have a quarter of their portfolio in debt, the remaining equity portion is enough to cause short-term losses. Balanced funds are still predominantly driven by equity. They have delivered losses even on a 1 or 2-year basis. That is, in the short term, there is enough of a chance that they erode your capital itself.

      The purpose behind STP into equity is to avoid putting a large sum at one go and suffer inadvertently from bad timing. It is to spread the risk out. So you put it in a low-risk (liquid) fund that will not deliver losses into the high risk fund. If you put it in a balanced fund, you may wind up losing money in a few months and therefore booking losses because of the STP. You’re not reducing the risk in lump-sum equity investing by running an STP through a balanced fund.

      You won’t pay DDT if you choose the growth option – if you’re in the highest slab, then DDT works out lower tax-wise. Even for the growth option, for a 6-month period in a liquid fund, the tax that you would have to pay on your gains will not be much. Filing capital tax returns is not that big a hassle, either. This should not be the concern when deciding the best way to invest.

      Thanks,
      Bhavana

  12. Thanks for your feedback.
    However, for the sake of discussion,
    STP works best as a defense mechanism when the market is volatile or falling. This is when the rupee cost averaging comes into play and helps overcome the risks. However, when the market is rising (as of now), the purchase price of the SIP will always be high. Also, one can expect a fairly good returns on balanced fund. So, doing a STP from balanced fund over a slightly longer term (say 1-2 year) may still be beneficial (assuming one is ready to take small risks). This is because, the chances of better returns from balanced fund (as compared to debt or liquid funds) is higher. This coupled with transfer to equity fund may result in relatively better returns (as compared to Debt -> Equity).

    Any comments?

    Here is another perspective: http://www.unovest.co/2017/06/invest-lumpsum-stp/

    1. Hello,

      First, an STP is simply a modified SIP. in SIP the money is in savings bank. In STP, it is in a liquid fund, earning slightly higher. The link you have given, seems to not understand it. Also STPS, if done for short periods, ahev to be followed up with SIPs, since STP or SIP have to be run for longer periods to average in the markets. The article you have given assumed very short periods of STPs, which may happen in uni-directional uptrending market. It is a flawed assumption in the first place, I am afraid. Also, to compare lumpsum and STP is not correct. What if you had invested lumpsum in 2008? you will be sitting on losses even after 3 years. The article does not seem to be taking such periods which did not work for lumpsum.

      A balanced fund can fall only slightly lower than the market. Why would you want a ‘from’ fund to be volatile, losing capital even before you transfer it? the idea is to invest systematically into equity market from your liquid money and in the process earning little more than savings rate in the liquid money. If SIP is useful. So is STP. The link given there is unfortunately quite flawed. STP does the same job as SIP except that instead of money being in savings bank, it is in a liquid fund. Averaging happens over longer time frames (across markets ups and downs). Neither SIP or STP will work unless you do it for 3-5 year time frames or have a long holding horizon. thanks Vidya

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