5 Things to Consider Before Using STP or SWP

STP and SWP are used in mutual funds as a way of managing investments. STP is designed to move money from one scheme to another, whilst SWP is an arrangement allowing you withdraw a fixed sum at regular intervals from your running scheme.

However, there are five key things to bear in mind before taking the plunge:

  1. Investment Goals and Risk Tolerance:
    STP: Do you want to gradually reposition the portfolio from high risk equity to low risk debt when nearing retirement? Alternatively, take advantage of market swings by switching from debt to equity? Clearly state your objectives and how much risk you can tolerate.
    SWP: Are you using SWP for steady flow of income post retirement or for any other reasons? Make sure that withdrawals do not eat into your corpus too soon. Think about what level of risk you can handle – will it be possible for your SWP amount be influenced by probable changes in the value of the plan?
  2. Investment Horizon:
    STP: For longer term goals, STPs work better. Some schemes may levy exit loads if frequent transfers occur within short periods; thereby affecting your returns on investments.

SWP: The best SWP investment time horizon for you all depends on what your objectives are. If it is meant for retirement income, then ensure that your SWP amount and investment corpus can maintain you over the retirement period.

  1. Tax Implications:

STP: Moving from equity to debt schemes within the same fund house usually does not attract capital gains tax, but there could be tax implications while moving between different fund houses.

SWP: Withdrawals under SWPs are treated as redemptions and might attract capital gains tax depending on the type of scheme (equity or debt) and holding period. Consult a financial advisor to comprehend the particular tax implications of any specific situation in your case.

  1. Market Volatility:

STP: Market volatility may prove beneficial for STPs; if the stock market falls, one can take advantage of such moment by transferring part of their money from debt to equity through STP with an expectation that there will be a future rise in prices.

SWP: When markets are down, your SWP withdrawals may fetch lesser amounts due to reduction in the Net Asset Value (NAV) of the scheme. Consider keeping a buffer to support desired withdrawal amounts during volatile periods.

  1. Exit Load:
    STP: Some schemes have exit loads associated with them in case you withdraw within a given timeframe. Take this into consideration while making your decision especially when you plan multiple transfers ahead.
    SWP: SWPs do not typically have exit loads payable. However, check out for any charges in a certain scheme.

Conclusion

STP and SWP are useful tools to handle mutual fund investments. You can leverage on these systems and be able to get what you want in terms of finances by following your investment objectives, risk appetite, time until you need the funds, tax effects, market instability and exit loads. Mind you; there are financial planners who can help you make right decisions towards this end.

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