We shed light on the differences between SIPs and STPs.
In your research pertaining to mutual funds, you may have come across the term ‘STP’. How is it different from SIP, and which is better? Let’s find out.
What is SIP?
The SIP is an abbreviation of the term ‘Systematic Investment Plan’. It is a periodic mode of paying money for a mutual fund without making a lump sum payment upfront, or denting your finances in any way.
- It is one of the most affordable ways to buy a mutual fund. Some SIP investments can be started with an investment of Rs 1,000 per month. This makes it open to practically every kind of investor, whatever their age, financial background or market know-how.
- The Systematic Investment Plan works on the principle of Rupee cost averaging. Thus, it handles market volatility in the best way, while keeping you invested and compounding the returns over a longer period of time.
- The money for the investment is auto-debited from your account every month. No further intervention is required on your part. The fund manager oversees your investment from time to time.
What is STP?
The ‘STP’ is an abbreviation for ‘Systematic Transfer Plan’. It is a variation of the SIP investment, wherein it allows for a high amount of risk mitigation just like the Systematic Investment Plan.
- There are two types of STPs: Capital appreciation STP, where the profit from the instrument is invested in another, and the Fixed STP, where a fixed amount of money is taken from one instrument and put in another.
- It allows the investor to transfer the invested money from one asset into another to increase its growth. Do note that the transfer is affected only between the same mutual funds from the fund house.
- The STP insulates the investor from loss, but it may also reduce returns in a bullish market. Do discuss this aspect of the matter with the fund manager.
- The STP benefits you only when you stay focussed on it. Some investors liquidate it owing to short term market trends or to capitalise on higher interest, but this can harm the entire instrument over the long run.
Should you consider an SIP v/s STP scenario?
The fundamental difference that can tip the balance in the SIP v/s STP debate is the amount of money you want to invest. Generally, those wishing to start small and build the fund gradually opt for a SIP or Systematic Investment Plan. Whereas if you have a lump sum amount of money to invest, then the STP or Systematic Transfer Plan is a good option.
The larger the amount of money you want to invest, the longer is the time frame under consideration for the STP. Meanwhile, SIP investments do not have much application for debt schemes, and they do not allow a switch between debt and equities the way STPs can.