Mutual Funds are an elegant way to invest, generate wealth while paying a small fee to the fund house for professional management of the money by Fund Manager and his team.
In our previous post – we understood what is the ‘Growth’ Option that is available to investors while investing in Mutual Funds.
Link: What is a Growth Option in Mutual Funds?
Through promotions made using advertising – we are aware about Mutual Funds and the concept of Systematic Investment Plan (SIP)
Today, we will try to understand two more concepts linked to investing & withdrawing from Mutual Funds
- Systematic Withdrawal Plan (SWP)
- Systematic Transfer Plan (STP)
Systematic Withdrawal Plan (SWP)
SWP allows the investor to withdraw a fixed amount or units from your mutual fund investments regularly (monthly, quarterly, etc.).
It is ideal for generating steady income post-retirement or meeting recurring expenses.
When to Use SWP:
Regular Income: For retirees or individuals needing consistent cash flow.
Disciplined Withdrawals: To avoid withdrawing a lump sum and disrupting financial planning.
Tax Efficiency: Only the gains are taxed, not the principal, potentially lowering the tax burden.
Disadvantages of SWP:
Can deplete the investment during prolonged market downturns.
May erode principal(which stays back) if withdrawals exceed returns.
Systematic Transfer Plan (STP)
A STP helps you transfer a fixed amount or units from one mutual fund to another (e.g., from debt to equity).
It is commonly used to manage risk or achieve better returns.
When to Use STP:
Risk Management: To shift from risky equity funds to safer debt funds as investment goals or safeguarding your capital during market turbulence.
Gradual Investment: To reduce market timing risks when investing in equities.
Portfolio Rebalancing: To maintain asset allocation aligned with goals.
Disadvantages of STP:
May incur exit loads or tax implications if transfers are frequent.
It is not ideal for short-term funds due to limited time for growth (especially when done for periods below 5years).
Choosing between SWP and STP depends on your financial goals—SWP for withdrawals, STP for reallocations or phased investments.
Hope this helps
All the best
You can read more content linked to finance here
What are are some handy tips to help maximize mutual fund returns?
Direct Stocks vs. Mutual Funds: Which Investment Option is Right for You?
Should One Invest in ELSS for Tax Savings?
How many stocks to keep in a ₹3 Lakhs Portfolio?
Happy Investing and God Bless!
About the Post Author:
The Author is an AMFI registered Mutual Fund Distributor (ARN-262589). Reach out to him via email: edteficonsult@gmail.com
Lateral Thinking 