If you have explored mutual funds, you have probably come across three common terms: SIP, STP, and SWP. They sound similar, and all three involve doing something “systematically” — but they serve very different purposes.

This guide explains each one in simple terms, with examples to help you understand when and how to use them.

SIP — Systematic Investment Plan

A SIP is the most popular way to invest in mutual funds. Instead of investing a large amount at once (lump sum), you invest a fixed amount at regular intervals — usually monthly.

How It Works

1. You choose a mutual fund scheme
2. You set an amount (e.g., ₹5,000 per month)
3. You pick a date (e.g., the 5th of every month)
4. On that date, the amount is automatically debited from your bank account and invested in the fund
5. You receive units based on the fund’s NAV on that date

Why SIP is Popular

Rupee cost averaging — When the market is high, your fixed amount buys fewer units. When the market is low, the same amount buys more units. Over time, this averages out your purchase cost and reduces the impact of market volatility.

Here is a simple example of ₹5,000 SIP over 4 months:

Average NAV over these 4 months was ₹47.50, but your average purchase price per unit was ₹20,000 ÷ 427 = ₹46.84 — slightly lower, thanks to rupee cost averaging.

When to Use SIP

• You earn a regular income and want to invest a portion each month
• You want to build discipline in investing
• You do not want to worry about timing the market
• You are investing for long-term goals (5+ years)

STP — Systematic Transfer Plan

An STP allows you to transfer a fixed amount from one mutual fund to another at regular intervals. It is commonly used to move money from a low-risk fund to a higher-risk fund gradually.

How It Works

1. You invest a lump sum in a fund (usually a liquid or debt fund)
2. You set up an STP to transfer a fixed amount from this fund to another fund (usually an equity fund) on a regular schedule
3. Units are redeemed from the source fund and invested in the target fund automatically

A Common Use Case

Suppose you receive a bonus of ₹6,00,000. You want to invest it in an equity mutual fund, but putting ₹6 lakh into equities all at once feels risky — what if the market drops right after?

Here is what you can do:

1. Invest the entire ₹6,00,000 in a liquid fund (a low-risk debt fund that earns modest returns)
2. Set up an STP to transfer ₹1,00,000 per month from the liquid fund to your chosen equity fund
3. Over 6 months, your money gradually moves from debt to equity

This gives you the benefit of rupee cost averaging on a lump sum — similar to what a SIP does for monthly income.

When to Use STP

• You have a large lump sum and want to enter equity markets gradually
• You received a windfall (bonus, inheritance, property sale) and want to invest it wisely
• You want to move from a debt fund to an equity fund (or vice versa) in a phased manner

Important Note on Taxation

Each STP transfer is treated as a redemption from the source fund and a fresh investment in the target fund. This means capital gains tax applies on the amount transferred out of the source fund. Keep this in mind when planning your STP.

SWP — Systematic Withdrawal Plan

An SWP is the opposite of a SIP. Instead of investing a fixed amount regularly, you withdraw a fixed amount from your mutual fund at regular intervals.

How It Works

1. You have an existing investment in a mutual fund
2. You set up an SWP to withdraw a fixed amount (e.g., ₹10,000 per month)
3. On the scheduled date, units are redeemed from your fund and the money is credited to your bank account

Who Uses SWP?

SWP is most commonly used by retirees or anyone who needs a regular income from their investments. Instead of withdrawing the entire amount at once, an SWP provides a steady cash flow while keeping the remaining money invested.

Example

You have ₹50,00,000 invested in a balanced mutual fund. You set up an SWP of ₹30,000 per month.

• Each month, units worth ₹30,000 are redeemed
• The remaining investment continues to grow
• If the fund earns returns higher than your withdrawal rate, your corpus can last a very long time — potentially even grow

SWP vs Fixed Deposit Interest

Many retirees keep money in fixed deposits and live off the interest. An SWP from a mutual fund can be a more tax-efficient alternative:

When to Use SWP

• You are retired and need regular monthly income
• You want a tax-efficient alternative to FD interest
• You want to draw down a large investment gradually
• You need predictable cash flow from your investments

SIP vs STP vs SWP — A Quick Comparison

Can You Combine Them?

Absolutely. Here are a couple of practical combinations:

SIP + STP: You run a monthly SIP into a liquid fund for safety, and an STP from the liquid fund to an equity fund for gradual equity exposure.

SIP now, SWP later: During your working years, you run SIPs into equity and hybrid funds to build your corpus. After retirement, you switch to SWP from those same funds to generate monthly income.

Key Takeaways

• SIP helps you invest small amounts regularly — ideal for building wealth over time
• STP helps you move a lump sum into the market gradually — reduces the risk of bad timing
• SWP helps you withdraw regularly from your investments — ideal for generating income
• All three bring discipline and automation to your investment journey
• You can combine them based on your life stage and financial goals

The beauty of these three tools is that they remove emotion from investing. Whether markets are up or down, your plan continues automatically — and that consistency is one of the biggest advantages in long-term wealth creation.