SIP, STP and SWP: What Each Instruction Actually Does

Each of the three is a standing order to the register, not a new kind of transaction. One buys units on a schedule, one moves money between two schemes on a schedule, one cancels units and pays out on a schedule. The three share one property: the rupee amount is set and the unit count is whatever the division returns.

Three sets of initials do an enormous amount of work in this subject, and they hide how little actually separates them. A systematic instructionA single registration that tells the record keeper to carry out the same transaction again and again on a stated schedule. is one transaction, written down once, and then carried out again on a schedule until somebody stops it. The transaction being carried out is one already settled earlier in this sequence: a subscription, a switch or a redemption. No repeating instruction introduces a new species of transaction, because a schedule fastened to an old transaction is still the old transaction.

One scheme carries the arithmetic from here to the last line. Girnar Asset Management Limited runs the Girnar Large Cap Equity Fund, an open ended equity scheme holding net assets of Rs 4,200 crore against 120.00 crore units in issue. Divide the first figure by the second and a single unit comes to Rs 35.00 exactly. That is the only value per unit fixed anywhere for the scheme. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations. The custodian, the auditor, the distributor, the registrar and transfer agent and the trustee company are named by the work each does rather than by a name of their own.

One fact has to be settled before a single division is worked, and every division below leans on it. The Girnar Large Cap Equity Fund has that one struck value per unit and no series at all: there is no second day behind it, no third, no month by month history. So every other value per unit below, Rs 32.00 and Rs 38.00 and later Rs 25.00 and Rs 45.00, is an assumed valueA figure used only so a division can be watched happening. An assumed value is fixed by no record and describes nothing that occurred.. Nobody knows what value per unit a future occasion will meet, and an assumed figure does not become a prediction by being written down.

Three things were settled earlier in this sequence and none of them is rebuilt here. How money becomes units was settled at the start of this sequence. What travels between an order and an allotment, and which struck value an application is considered against, was settled under pricing. The switch, with its two legs and the load falling on the leg being left, was settled immediately before this one. All three are taken as given, and one job is left: to stand three repeating instructions next to each other and ask what each one is telling the record keeper to do.

What is a systematic instruction, and what is it not?

A systematic instruction is one transaction, repeated, and that really is the whole of the definition. The instruction is a repeating order sitting with the registrar and transfer agent, and it reads roughly like this: on this schedule, for this amount, in this scheme, do this transaction, until the holder says otherwise. On any single occasion the registrar does precisely what it would do with a one off order of the same kind. The schedule is the only thing the instruction adds, and a schedule is not a transaction.

A household tells the vegetable seller at the end of the lane: every Sunday, a hundred rupees of tomatoes, whatever tomatoes happen to cost that week. The household has not bought a new product and has not entered a scheme of any kind. The household has bought tomatoes, fifty two times, in the ordinary way. Some Sundays it walks home with a heavier bag and some Sundays with a lighter one, and the hundred rupees never moves. The bag getting heavier and lighter is the whole of the arithmetic that comes later.

So what is a systematic instruction not? A systematic instruction is not a scheme, and it is not a product. The scheme sees only the transactions the instruction produces and cannot tell them apart from any other transaction of the same shape, so there is no line on the Girnar Large Cap Equity Fund's books where an instruction sits. The instruction does not change what the scheme holds. Nor is it a separate registration with any authority. And it is emphatically not a fourth kind of transaction standing beside a subscription, a switch and a redemption. Count the new transaction types that all three instructions introduce between them and the count is exactly zero.

What does one instalment of a systematic investment plan actually do?

A systematic investment planA set rupee amount put into one scheme again and again on a stated schedule, each occasion being an ordinary purchase of units. is a fixed rupee amount subscribed to one scheme on a schedule, and every occasion is a full subscription in its own right. Each instalment carries an application of its own. Money for it arrives at the scheme separately. Each instalment attaches to a value per unit on its own footing, under precisely the attachment rule settled under pricing and set by the Securities and Exchange Board of India (SEBI). An instruction registered once does not produce one large transaction; it produces a queue of ordinary ones, each of which is treated exactly as though nobody had ever registered anything.

One registration and many transactions are easy to run together, so the difference is worth slowing down on. The registration is a single event. The transactions are not. Twelve occasions are twelve separate subscriptions that happen to share a registration, and if the registrar and transfer agent had to narrate them it would have twelve stories to tell rather than one. Girnar Asset Management Limited does not hold a pooled instalment account somewhere; there is no waiting room. Each occasion lands, divides and is written into the folio, and then the next one starts from scratch.

How that registration is created, what authority it carries over a bank account, what the record keeper does on an occasion that does not go through, and how the whole arrangement is paused or brought to an end are covered separately in this sequence. The three instructions differ in what they tell the record keeper to do, not in how the telling is arranged.

Take one occasion and work it. An instalmentOne occasion of a repeating instruction, divided and recorded entirely on its own without reference to any occasion before or after it. of Rs 10,000/- meets the Girnar Large Cap Equity Fund at a value per unit of Rs 35.00. Divide: 10,000 over 35.00 comes to 285.714285 with the digits repeating without ever ending, and the record carries three decimals, so 285.714 units are written in. The division is the whole event. The holder decided the rupees and arithmetic decided the units, and that ordering is the property this entire guide is built on.

How is a systematic transfer plan different from one switch?

Only by the schedule, and that is the honest answer. A systematic transfer planA set rupee amount taken out of one scheme and put into another, again and again on a stated schedule. is a fixed rupee amount moved out of one scheme and into another on a schedule, and each occasion is the switch that was worked out end to end earlier in this sequence. Two legs. Units cancelled in the scheme being left, units created in the scheme being entered, both under one instruction. Any load that falls on the leg being left, falls. The arithmetic of a transfer instruction is exactly the arithmetic of the switch, and the switch is covered separately.

The schedule adds one thing, and it is worth naming precisely. Run in the Girnar range, an instruction might move a fixed amount out of the Girnar Large Cap Equity Fund and into the Girnar Broad Market Index Fund on each occasion, or the other way round. Girnar Asset Management is not doing anything new on any single occasion; it is doing the switch it would have done anyway, on a repeat. The one structural fact that separates this instruction from the other two is that it reaches two schemes at once.

Everything else about the transfer instruction follows from reaching two schemes. Because two schemes are touched, two sets of conditions can be in play on the same occasion: the conditions attaching to the leg being left and the conditions attaching to the leg being entered. Because a leg is being left, a load can fall on it. Neither of the other two instructions can produce a load on the way in. Among the three, only the transfer instruction can have two separate sets of conditions bearing on one occasion, and only it has a leg for a load to land on.

One more consequence belongs here, and readers rarely have it pointed out to them. The leg being left is a redemption. Units are genuinely cancelled, and the fact that the money never reaches a bank account does not change what happened to those units. Whatever follows from a cancellation in tax terms therefore follows here too, on every occasion, and it is settled in tax law rather than by SEBI. Rates, thresholds and holding periods all move. Read the current position at incometaxindia.gov.in, and read the transaction conditions themselves at sebi.gov.in.

A systematic withdrawal plan pays out rupees, but out of what?

From units being cancelled, and from nowhere else at all. A systematic withdrawal planA set rupee amount taken out of one scheme on a stated schedule, raised each time by cancelling enough units to cover it. is a fixed rupee amount taken out of one scheme on a schedule, and on each occasion the registrar and transfer agent works out how many units it takes to raise that amount at that occasion's value per unit, cancels exactly that many, and sends the money out. The rupees a holder receives are the proceeds of their own holding being reduced, not a payment out of anything the Girnar Large Cap Equity Fund earned.

The idea that a payout is a holding being reduced is the one holders most need and least often get, so here it is from ordinary life. A household with a store room of grain that takes out one sack every month is not being paid anything by anybody. The store room is smaller in December than it was in January, and if the household describes those sacks as income at the dinner table, nothing about the store room changes to match. A withdrawal instruction is that store room. A withdrawal instruction is a repeated sale of a holding, dressed in the regularity of a salary, and the regularity is the only thing about it that resembles one.

Work it on the holding created at the start of this sequence. The holding is 2,857.143 units of the Girnar Large Cap Equity Fund, from Rs 1,00,000/- divided by Rs 35.00. A fixed withdrawal of Rs 20,000/- meeting a value per unit of Rs 35.00 needs 20,000 over 35.00. The division comes to 571.428571 with the digits repeating, and the record carries three decimals, so 571.429 units are cancelled. Take that from 2,857.143 and 2,285.714 units remain. Girnar Asset Management pays out Rs 20,000/-, and the holding is smaller by exactly the units it took to raise it.

One small thing in that division gets quietly rounded away in most accounts. Name it rather than smooth it over. Cancelling 571.429 units rather than 571.428571 cancels three ten thousandths of a unit more than the arithmetic strictly asks for, and at Rs 35.00 a unit that excess is worth exactly one and a half paise. The excess is a rounding residue. It went against the holder on this occasion, and it will not always go the same way. An account that reports only the clean figures leaves the untidy ones out of sight.

And because units are genuinely cancelled here too, the same note as on the transfer instruction applies. A withdrawal instruction produces a redemption on every occasion. Tax law settles what follows from a cancellation, and tax law moves. Rates, thresholds and holding periods are at incometaxindia.gov.in, and the transaction conditions themselves at sebi.gov.in.

What is the one thing all three instructions share?

Every one of them pins down the rupees and leaves the unit count to a division. Fixing the rupees and leaving the units to a division is the one property that generates every difference below. The holder names an amount of money. The value per unit on the occasion is named by the scheme's own books. The unit count is then not named by anybody: it is whatever the division returns, carried to the decimals the record keeps. In all three instructions the money is the instruction and the units are the consequence, and once that is seen, none of the differences between them is surprising any more.

Running the consequences out gives the rest. Because the rupees are fixed, an instalment meeting a lower value per unit buys more units, without anybody deciding that it should. Because the rupees are fixed, a withdrawal meeting a lower value per unit cancels more units, again without anybody deciding it. And because the rupees are the instruction, none of the three can be restated in units without turning into a different instruction altogether: an order to buy 300 units a month is a real thing somebody could give, but it is not a systematic investment plan, and it behaves in the opposite direction.

Here is the same idea from the household end of the lane. The Sunday tomato arrangement fixes the hundred rupees, so the bag is heavier in the week tomatoes are cheap. An arrangement that fixed the weight instead, two kilos every Sunday whatever they cost, would empty a different amount from the purse each week. Both are perfectly sensible ways to shop. The two arrangements are not the same instruction, and they cannot produce the same numbers. Fixing the money and fixing the quantity are two different orders, and almost every confusion that follows comes from treating one as though it were the other.

With all three now defined on their own terms, they can be set beside each other honestly. The grid below leaves cells empty where there is nothing it is entitled to put in them. Two of its rows are drawn as dashed outlines rather than filled, and the reason differs between them. One is a matter SEBI settles. The other is a figure no record of the scheme carries at all.

What does a fixed rupee purchase do to the average cost per unit?

The average cost per unit lands below the plain average of the values it met, always, unless every value was identical. The result is not an opinion and not a finding about the Girnar Large Cap Equity Fund. It is what division does. Here it is worked in full, and before the first figure appears the fixed point goes down again: the Girnar Large Cap Equity Fund has one struck value per unit, Rs 35.00, and no series behind it. Rs 32.00 and Rs 38.00 below are assumed, put there only so three divisions can be watched instead of one.

Now the figure the whole guide turns on. The average cost per unitEvery rupee put in, divided by every unit received. Not an average of prices, and not a figure any single occasion produced. is total rupees over total units: Rs 30,000/- divided by 861.372 units, which is Rs 34.8281578, and to four decimals Rs 34.8282. Set that beside the plain average of the three values met, the arithmetic meanAdd the values and divide by how many there are. The mean treats each value as counting equally, whatever quantity was bought at it.: 35.00 plus 32.00 plus 38.00 is 105.00, and 105.00 over 3 is Rs 35.00 exactly. The average cost came out Rs 0.1718 below the plain average, or 0.49 per cent of Rs 35.00. No market did that. Arithmetic did.

Why does it happen? The middle row of the table holds the answer. The occasion that met the lowest value bought the most units, 312.500 of them, so it carries the most weight when total rupees are divided by total units. The occasion that met the highest value bought the fewest, 263.158, so it carries the least. A plain average would have counted all three values equally; the division counts them in proportion to the units each one produced. The weighted result has a name. It is the harmonic meanThe average that results when a fixed quantity is divided by each of several values and the results are added. The harmonic mean sits at or below the plain average, never above it. of the values met.

Say the general form out loud. The general form is what stops this being mistaken for a fact about schemes. Divide a fixed amount by each of several values, add up the answers, then divide the fixed total by that sum, and what comes out is the harmonic mean of those values. The same holds for a fixed hundred rupees of tomatoes every Sunday, for a fixed two hundred rupees of fuel every Thursday, and for any fixed sum of money spent repeatedly on a thing that carries a price and can be split. There is nothing about a scheme, a unit or a market in that sentence, and there does not need to be.

Do the three roundings cancel out, or do they pile up?

The roundings pile up, and they do not have to be large to be worth naming. Each occasion of a systematic instruction is a separate transaction, so each one is divided and rounded entirely on its own. Three occasions produce three separate rounding decisions rather than one at the end. Two of the three divisions above did not come out clean, and the record carries three decimals, so something had to be given up or taken on each time.

Read the last row rather than the tidy 861.372 above it. Three separate roundings netted to roughly two ten thousandths of a unit fewer than exact division asks for. At Rs 35.00 a unit that is worth a little over half a paisa. The size is not the point; the failure to cancel is. Run an instruction for years rather than three occasions and the residues keep accumulating in whichever direction each division happens to fall. No rule is being broken. A record with three decimal places has to do something with a division that has no end, and rounding is what it does.

The middle row deserves a moment on its own. Rs 10,000/- divided by Rs 32.00 is 312.5 and stops, so the residue on that occasion is not small, not rounded and not approximately anything. The residue is exactly zero. A residue of exactly zero is a genuinely different kind of entry from the two either side of it, and the drawing below leaves it unshaded for that reason.

One check on this arithmetic looks reassuring and is worth nothing. Multiplying 861.372 units by Rs 34.8282 gives back roughly Rs 30,000/-, and it feels like confirmation. It is not. Rs 34.8282 was defined as Rs 30,000/- divided by 861.372, so multiplying it back can only return the number it started from, whatever mistakes were made earlier. A check that cannot fail is not a check, and the only useful thing it proves is that multiplication reverses division.

A second route never touches the recorded unit counts at all, so it can genuinely fail. Work the harmonic mean straight from the three values. Put 1 over 35, 1 over 32 and 1 over 38 on a common denominator of 21,280. The numerators become 608, 665 and 560, adding to 1,833 over 21,280. Three divided by that fraction is 3 times 21,280 over 1,833, or 63,840 over 1,833. The quotient is Rs 34.8281505. Round to four decimals and it is Rs 34.8282, the same figure the units route produced. The two agree to four decimals and part company after that, and the reason is exactly the residues in the table above: one route rounded three times on the way and the other never rounded at all.

Is that lower average an advantage, or only what division does?

Answer it by asking a question almost nobody asks: who, exactly, paid Rs 35.00? Not the holder in the table above, who paid Rs 34.8282. Not the scheme. Not any market on any occasion. Rs 35.00 is not a value that was struck three times; it is the plain average of three values that were struck once each. Before a comparison can mean anything, the figure on the other side of it has to belong to somebody, and until this paragraph the Rs 35.00 belonged to nobody at all.

The figure does belong to somebody, though, and once that is seen the whole comparison changes shape. Rs 35.00 is the sum a fixed unit order would have handed over. Suppose instead of fixing the rupees a holder had fixed the units, ordering 285.714 units on each of the three occasions. The fixed unit order costs 285.714 times Rs 35.00, plus 285.714 times an assumed Rs 32.00, plus 285.714 times an assumed Rs 38.00. Added up, it is 285.714 times 105.00, or Rs 29,999.97 in total, for 857.142 units. Dividing: Rs 29,999.97 over 857.142 units is Rs 35.00 exactly, to the paisa.

So here is the honest statement of the comparison, with both sides named. On one side, a fixed rupee instruction: Rs 30,000/- put in, 861.372 units received, average cost Rs 34.8282. On the other, a fixed unit instruction: Rs 29,999.97 put in, 857.142 units received, average cost Rs 35.00 exactly. The two put in essentially the same money, three paise apart, and one ended with 4.230 more units. Those extra units are 4.230 over 857.142, or 0.49 per cent more. The same 0.49 per cent showed up as a lower cost per unit, arrived at from the other end. Two instructions were compared with each other, and neither of them was compared with a market, an outcome or with doing nothing at all.

Now the limit. The fixed rupee instruction has not been shown to produce a better result, a safer one, or a cleverer one. What has been shown is narrower: dividing a fixed amount by several values and adding the answers gives the harmonic mean of those values, and the harmonic mean sits below their plain average. The property belongs to division. It held before anybody thought of a scheme, and it holds for anything else bought with a fixed amount of money on a repeating schedule. Whether a holder is better off is a question about what values the occasions actually met and over what stretch, and neither of those is available here, because only one struck value per unit exists for the Girnar Large Cap Equity Fund here, with no series standing behind it.

Change the assumed values and the size of the gap changes with them. Bring them closer together and it shrinks towards nothing; push them apart and it grows. The harmonic mean is never above the plain average, so the direction never flips. The size of the gap is entirely a function of the assumed values, which makes the mechanism fixed and the magnitude a fact about nothing.

What does the same division do on the withdrawal side?

Exactly the same thing, with the sign turned round, and this is the half of the mechanism that usually gets left out. Take the holding of 2,857.143 units in the Girnar Large Cap Equity Fund again. A fixed Rs 20,000/- taken out at a value per unit of Rs 35.00 cancels 571.429 units. The same fixed Rs 20,000/- taken out at an assumed Rs 32.00 cancels 20,000 over 32.00, or 625.000 units exactly. Cancelling at the lower value gives up 53.571 more units, for the same money in hand. Wherever the value per unit is lower, the fixed amount that ends up with the most units is also the fixed amount that gives up the most units, and a single division is doing both jobs.

Push it one step further and the mirror is complete. Across those two occasions the holder took out Rs 40,000/- and gave up 1,196.429 units. The average value per unit actually realised is 40,000 over 1,196.429, or Rs 33.4328. The plain average of the two values met is 35.00 plus 32.00 over 2, or Rs 33.50 exactly. The realised average sits Rs 0.0672 below the plain average, or 0.20 per cent of Rs 33.50. It is below for precisely the reason it was below on the purchase side: more units left on the occasion that met the lower value, so that occasion carried the greater weight.

Read the mirror the other way round. On this side, below is not the flattering direction. On the buying side, landing under the plain average meant more units for the money. On the selling side, landing under the plain average means more units surrendered for the money. An account that shows the purchase side of this arithmetic and stops teaches half a mechanism and leaves the comfortable half standing alone, and the two halves are the same division. Neither half is a fault in the instruction and neither is a feature of it. Both are what happens when the rupees are fixed.

What does none of the three instructions do?

Start with the biggest one. None of the three changes what the Girnar Large Cap Equity Fund holds. Kalyani Bhagat runs the portfolio, and no instruction sitting with the registrar and transfer agent reaches into that work or asks anything of it. What arrives is money and what leaves is money, and neither carries a note about how the order that produced it was arranged. A scheme with a thousand repeating instructions running against it and a scheme with none look identical from the inside.

None of the three moves the value per unit for anybody, either. The value per unit is struck out of the scheme's own books, net assets divided by units in issue. A subscription brings in money and creates units in the same proportion, so the division comes out where it would have anyway. A holder who does not run any repeating instruction is not affected in either direction by a holder who does. An instruction is a statement about one holder's timing and one holder's amount, and it has no reach at all beyond the folio it belongs to.

The smaller limits matter too, and they are the ones oversold in ordinary conversation. None of the three is a product; there is nothing to hold, nothing with its own value per unit, nothing that appears as a line in any scheme. None of them is separately registered with any authority as a thing in itself, though the conditions under which any of them may be offered at all are certainly SEBI's. None of them promises an outcome, protects against anything, or makes any statement about what is coming. Each of the three is an order about when and how much, resting on transactions that were fully worked out earlier in this sequence.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.