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SIPs, STPs, SWPs… too many options! Which one is for me?!

by Money Puzzle   ·  October 11, 2019   ·  

SIPs, STPs, SWPs… too many options! Which one is for me?!

by Money Puzzle   ·  October 11, 2019   ·  

You would have heard, read, come across the word SIP many times. But how many of you know what the acronym means (I’m hoping everyone realises it’s an acronym!).

Is it a mutual fund?

Is it a particular type of mutual fund scheme?

Is it the answer to your investment dilemma?

Is it the magical security which will give you 12%-15% return every year?


Is it what will keep your money safe, without negative returns, but you have to remain invested for a few years to get enough return to achieve your financial goal?

Of course, SIP is really none of the above.

It is simply a feature that most mutual funds offer across nearly all their open-ended schemes, be it equity or debt. In fact, even brokerages offer SIP as a feature for investing in individual stocks. This feature allows you to break up your investment into several smaller lots and also to invest at a pre-defined date each month. The smallest amount you can invest via SIP is Rs 500 and you can have a minimum tenure of six months – and your frequency of investing through this feature can be as quick as daily or as wide as every three months.

In other words, first you pick a mutual fund scheme of your choice and then use the SIP feature to invest regularly any amount that suits your pocket.

What’s the big fuss about this feature? Isn’t it just like breaking up your meals and eating 3-4 times a day at regular intervals?

Exactly! It is like that. The big fuss is that when we keep at it or when we keep investing through this feature rather than dumping a lot of money in one go, the long term returns from an asset like equity become smoother.

How? This happens because, when you invest regularly, automatically you are buying equity even when markets are falling. The auto pilot mode of SIP investing makes sure you don’t stop when you see falling stock prices. The natural behavioural tendency is to get scared of further losses in a falling market and stop investing. An automated feature like SIP in a way lets you go on across different market cycles.

When you split your buying in equal measure across rising and falling markets, the volatility in returns becomes relatively smooth. But this does not happen in year one, two or even three of your investing experiences. The smoothening of returns will start to show up in year 5-7-10.

SIP by itself will do little for you, unless you remain invested for longer periods of time.

Now we come to the most important question – why is it important?

Because, the amounts involved can be as little as Rs 500 a month, it is automated and you can potentially register a very long-term investment spanning 10-20-30 years or even a perpetual SIP.

It is important because it moulds your behaviour to make you a regular investor and a long-term investor, both very important characteristics if you want to create long term wealth.

With such a small commitment and an automated process, you can easily begin investing to create wealth with your first salary. You will however, be able to appreciate the benefit only 10 years later, thankfully SIP allows you to keep investing for that period and also remain invested.

This table shows you the actual SIP monthly returns of the top 10 open ended, actively managed equity mutual fund schemes by size – across tenures.

SIP returns across 4 tenures in 3 different time periods
Returns from equity funds are more predictable the longer you remain invested in your SIP.
  As on 1 Oct 2019
Scheme Name 3 year monthly SIP return 5 year monthly SIP Return 10 year monthly SIP return 15 year monthly SIP return
ICICI Bluechip Fund 5.81% 8.23% 11.85%  
SBI Bluechip Fund 5.44% 7.66% 12.37%  
Aditya Birla Frontline Equity Fund 2.80% 6.04% 11.09% 13.43%
Kotak Standard Multi-cap 6.65% 9.71% 14.11%  
HDFC Equity Fund 3.83% 7.02% 10.95% 13.59%
  As on 1 Jan 2019      
Scheme Name 3 year monthly SIP return 5 year monthly SIP Return 10 year monthly SIP return 15 year monthly SIP return
ICICI Bluechip Fund 8.17% 9.41% 12.79%  
SBI Bluechip Fund 6.96% 9.37% 12.92%  
Aditya Birla Frontline Equity Fund 5.41% 7.71% 11.96% 14.14%
Kotak Standard Multi-cap 9.27% 11.56%    
HDFC Equity Fund 7.34% 8.49% 12.14% 14.44%
  As on 1 Sep 2018      
Scheme Name 3 year monthly SIP return 5 year monthly SIP Return 10 year monthly SIP return 15 year monthly SIP return
ICICI Bluechip Fund 8.67% 10.12% 13.16%
SBI Bluechip Fund 7.30% 10.30% 13.12%  
Aditya Birla Frontline Equity Fund 6.04% 8.63% 12.29% 14.50%
Kotak Standard Multi-cap 9.72% 12.64%    
HDFC Equity Fund 7.85% 9.56% 12.54% 14.84%


Table takeaways

The table showcases just 5 schemes, but please do not consider this as a recommendation. There are many other schemes available, some of the others might be better performers and some worse. These have been showcased because of the asset size which implies relatively higher investor holding in these schemes.

  1. If you look at the 3-year return for each scheme, the difference, depending on when you invested can be anywhere between 3% 4% per annum – for the examples taken here.
  2. If you look at the 10- or 15-year return, the difference starts to shrink. Again, depending on when you invested, the difference in return can be 0.5%-1% – for the example taken here.

This lower difference across periods when you remain invested for a longer time, is what smoothening of returns means.

What about STPs and SWPs?

These are also features extended by mutual funds across their schemes. STP refers to a systematic transfer plan and SWP is a systematic withdrawal plan. Unlike SIP, which has some relevance across most investors, STP and SWP are more situational.

STP lets you transfer a fixed amount from one scheme to another at defined periods. This can be done within the same mutual fund house, from one of their schemes to another. Let’s say you get a windfall gain, inheritance or a bonus and you want to invest in equity, but aren’t quite sure whether to invest the entire amount in one go or not. Here is where an STP is relevant. You can pick an extremely low risk and low-cost scheme like a liquid fund from the asset manager whose equity fund you want to invest in, create a STP and then fixed amounts will get transferred to the equity fund – just as if you have started a new SIP.

Why not just keep the money in your bank account and begin SIP instead? You could, but many of us tend to spend what’s in the bank account – rather than get around to investing it.

An STP disciplines you to keep the investment corpus separate. Moreover, your bank savings account return is possibly limited to around 4% per annum. Liquid funds have the potential to deliver 6%-7% per annum on the money you invest, thus, along with discipline, your return is also enhanced.


This is another different feature, possibly my least favourite. An SWP is almost the opposite of SIP, it lets you automate your redemption of a fixed amount on a period basis. You can use it to create a regular monthly income from the gains of your mutual funds.

However, it has to be used with caution. If you create SWP from your equity fund too soon into your investment tenure, you may end up redeeming capital after a few turns. Equity investments need time to cook and withdrawing too soon, whether through an SWP or not works against the objective of wealth creation.

SWPs are also a good way to get regular income from the less volatile debt funds, but again you have to allow for the corpus to build up a bit. These are market linked securities and are subject to the uncertainties of capital markets, which means for sometime your funds can be volatile. Leave the money in a debt fund for a year or two and you would have some accumulated gains to begin your SWP.

There is another reason I don’t like this too much. The amount to be withdrawn each month via SWP has to be thought through depending on the size of your existing investment. You don’t want to go through the corpus too fast. This is not an easy calculation. There is also a taxation impact which needs to be considered.

I wouldn’t recommend that you start SWP without guidance; speak to a qualified advisor for this.

SIP is a behaviour management feature and not a scheme

Quick recap – SIP is a must do and START NOW, STP and SWP can wait. SIP help you start investing early by letting you put small amount, they help you reduce volatility in returns (over long periods) by making you invest regularly and lastly, because its an automated feature, it helps in remaining invested through the uncertainties of capital markets. Basically, behaviour management.

What you should know is that the money you invest through SIPs is accessible to be redeemed whenever you need. The most important factor however, is not the feature itself rather the quality of the underlying scheme that you will use this for.

Don’t blindly put money in SIP, research whether the scheme is suitable for you or not.

Hey, I know that is easier said than done and not everyone has the time or the ability to research the quality of a mutual fund scheme. If that is you, then I would suggest, get an advisor. Its foolish to enter into market linked products like mutual funds without knowing enough and just because the return looks good!!

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