There are several ways to invest in mutual funds: Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), and Systematic Withdrawal Plan (SWP). Each method caters to different investor needs and financial situations. Let us look at which is suitable for which type of investor, using the examples of Ramesh, Mahesh, and Suresh.
As discussed, Ramesh, aged 24, is a salaried individual with a fixed monthly income. For people like Ramesh, a monthly SIP is ideal. SIP allows him to invest a fixed amount every month, which can be automated through bank auto-debit. This helps in disciplined investing and benefits from rupee cost averaging, as he buys more units when markets are down and fewer units when markets are high.
Let’s take the example of Ramesh, a salaried individual who wishes to invest ₹20,000 every month to meet his future financial needs such as building an emergency fund, making a house down payment, planning for his wedding, and accumulating a retirement corpus. He chooses to do a SIP of ₹5,000 each for his four goals. SIP is especially convenient for those with regular monthly income as it ensures disciplined investing. One of the key benefits is rupee cost averaging: when the market is down, Ramesh buys more units; when it is high, he buys fewer units, thus managing market volatility. Additionally, SIPs are highly flexible—he can increase his investment as his income grows, reduce or pause SIPs during financial constraints, and even stop them without penalty if he loses his job, without losing accrued interest.
Now, let’s take the example of Mahesh, aged about 30 years, who is running a small business. Unlike Ramesh, Mahesh’s monthly income is not fixed—sometimes his earnings are higher, other times lower. However, his financial objectives are similar: he wishes to accumulate funds for a house downpayment, his children’s education, and a retirement corpus.
The best solution for Mahesh is to park any lump sum he receives into a debt fund, which is generally considered safer and less volatile than hybrid or equity funds. For instance, let’s assume Mahesh has ₹2 lakh available; he can invest this amount in a debt fund. From this corpus, Mahesh can set up a Systematic Transfer Plan (STP) to periodically transfer fixed sums into hybrid or equity funds according to his planned duration. For example, every month, ₹30,000 can be transferred into three different funds—₹10,000 each earmarked for his house purchase, children’s education, and retirement. This arrangement will comfortably last for six months.
During these six months, whenever Mahesh receives additional income, he can deploy it into the debt fund, ensuring he does not have to worry about maintaining a large balance in his savings account. The same benefits that apply to SIPs—rupee cost averaging, disciplined investing, and flexibility—also hold true for STPs, making them an ideal choice for someone like Mahesh who has irregular income but clear financial goals.
Now, consider Suresh, aged about 60 years, who recently retired from a private job after over 30 years of service. Suresh has accumulated a retirement corpus of ₹1 crore through his Provident Fund, Gratuity, and other savings. He decides to allocate ₹20 lakh each to Fixed Deposits and Senior Citizen Savings Schemes to cater to his emergency and secure needs. The remaining ₹60 lakh is invested in a mix of debt and hybrid mutual funds, which have the potential to earn around 10% annual returns.
To generate a regular monthly income, Suresh opts for a Systematic Withdrawal Plan (SWP), withdrawing ₹30,000 per month, which totals ₹3,60,000 per year—equivalent to a 6% withdrawal rate. Given that his investments are expected to earn around ₹6 lakh annually, Suresh’s withdrawals amount to only part of his total returns, allowing the remaining ₹2.4 lakh to stay invested and continue to grow over time. This approach provides Suresh with a steady income while helping his retirement corpus sustain and potentially grow in the long run.
Additionally, SWP offers remarkable flexibility to investors, similar to SIP and STP. The withdrawal amount under SWP can be increased, decreased, or even paused, depending on one’s changing financial requirements. Investors have the option to withdraw either the entire corpus or just a part of their funds whenever needed for specific financial goals. While the remaining amount stays invested in the market, it continues to earn returns, thereby optimising growth.
This approach is particularly beneficial for those seeking safety of capital, a steady monthly income, and the advantage of lower tax impact on interest earnings, all while maintaining liquidity. SWP is thus well-suited for retirees and anyone prioritising regular income along with capital protection.
SIP: Best for salaried individuals or anyone with regular income wanting to build wealth gradually.
STP: Suitable for investors with lump sum amounts who wish to stagger their entry into equity markets.
SWP: Ideal for retirees or those seeking a regular income from their investments.
In summary, SIP, STP, and SWP are versatile methods that cater to different life stages and financial goals. Choosing the right method depends on your cash flow, investment horizon, and need for liquidity or regular income.
Investors should choose hybrid funds according to their own risk appetite, investment horizon, and the tax implications of each category.
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Disclaimer – Mutual Fund investments are subject to market risk, please read the offer document carefully before investing. The Article is for investor education purpose only
Vikram Sapparad
Arthika Swatanthra
Qualified Finance Professional
