Why STP and SWP matter more than SIP, explains stock market expert

India Today

07-08-2025

When it comes to investing, most people have heard of SIPs (Systematic Investment Plans). They're easy to set up, simple to explain, and popular among new investors. But according to investor and stock market expert, Rajnish Mehan, it's not just the SIP that matters. It's the other two tools, STP (Systematic Transfer Plans) and SWP (Systematic Withdrawal Plans), that can quietly define your financial journey.advertisementHe wrote on LinkedIn, 'In investing, the first and the last step often decide the whole journey. That's why STP and SWP matter more than most investors realise.'
WHAT IS STP?STP is designed for situations where you have a large amount of money, say, from a fixed deposit maturity or property sale, but don't want to put it all in the market at once. The idea is to spread the risk by moving the amount gradually from a low-risk fund to equity.
For instance, let's say your fixed deposit of Rs 10 lakh matures. Instead of investing the entire sum into equity funds in one go, you could park it in a liquid or debt fund and set up an STP. This way, around Rs 83,333 is transferred each month into an equity fund over a 12-month period.Mehan explains, 'STP builds discipline at the point of entry.' This approach protects you from investing everything during a market high, giving your money a better chance to grow steadily.WHAT ABOUT SWP?On the other end of the investment journey lies the SWP. This is more about creating a steady, reliable income, especially useful for retirees. Instead of withdrawing the entire investment, you set up fixed monthly withdrawals while the rest of your corpus stays invested.Let's say someone has a retirement corpus of Rs 1 crore. By setting up an SWP of Rs 50,000 a month, they get Rs 6 lakh a year in predictable income, while the rest of the money remains invested and continues to generate returns.'The purpose here is not growth, but predictable income,' Mehan points out. 'SWP builds sustainability at the point of exit.'TAX RULES TO KEEP IN MINDBoth STP and SWP come with their own tax rules. For STP, each monthly transfer is treated as a redemption from the original debt or liquid fund. So every time money is moved, there's a tax event, and the gains are taxed as per your income slab, no matter how long the money has stayed in the fund.SWP works a bit differently. Each withdrawal includes both the capital and the gains. Tax applies only to the gains, and the rate depends on how long you've held the investment. For equity funds, if the units withdrawn have been held for over a year, gains beyond Rs 1.25 lakh are taxed at 12.5% under long-term capital gains (LTCG).Mehan cautions that 'the nuance lies in how these cash flows interact with your long-term plan, not just in the headline tax rate.'WHY BOTH TOOLS MATTERSIPs help you enter the world of investing. But STPs and SWPs help you navigate it wisely, especially when you have a big lump sum to invest or need steady income without eating into your entire savings.'Together,' Mehan sums up, 'they complete the investing cycle. Because in the end, investing is about building a structure where money works for you when you need growth, and supports you when you need pension.'- EndsMust Watch