SIP vs STP – Know Which is Better

In recent times, mutual fund investments through SIP have become quite popular. Anyone who has invested in mutual funds is already aware of how convenient and flexible SIP investments are. Thanks to their disciplined approach, SIP allows investors to invest a fixed amount regularly into a mutual fund of their choice for long-term gains.

However, a Systematic Investment Plan isn't the only way to invest in mutual funds systematically for lower risk and greater returns. There's another intelligent way to reduce your investment risk in mutual funds with the Systematic Transfer Plan, which allows you to transfer a fixed amount from one fund to another to manage risk in a highly volatile market.

While both SIP and STP allow investors to make regular, systematic investments in a mutual fund scheme, their objectives and risk implications are quite different. Not sure which is better, SIP or STP? This article will unpack the major differences between SIP vs STP.

What is a systematic investment plan (SIP)

SIP is a method of investing in mutual funds that allows you to invest a fixed amount of money at predetermined intervals into your preferred mutual fund scheme. You can start your SIP investments with an amount as low as Rs. 500 and build a corpus over time.

It works on the concept of rupee cost averaging, where the fund manager buys more units when the prices are low and fewer units when the market is declining. This helps to reduce the per-unit cost of your investment.

SIPs help investors practice disciplined investing by getting in the habit of investing a fixed amount regularly. The fixed investment amount is automatically deducted from your bank account, and the fund manager makes allocations in various instruments based on the structure of the mutual fund.

Thus, SIP gives you an opportunity to participate in the market while controlling the risk as the funds are professionally managed. The best part is that SIP is highly flexible, so you can increase or decrease your investment amount or discontinue the investment whenever you wish.

What is a systematic transfer plan (STP)

Under a systematic investment plan, an investor can transfer their investment gradually from one mutual fund scheme (source scheme) to another scheme (target scheme). STP enables investors to make periodic transfers with an aim to manage their risk exposure in a highly volatile market.

Typically, STP involves the transfer of investment from debt funds to equity funds to manage risk and gain greater returns simultaneously. It helps investors gain market advantage by shifting to a different mutual fund scheme when it offers higher returns. With this strategy, you can eliminate the risk of investing a lump sum amount at the wrong time in an equity fund.

STP is also an excellent way to diversify and rebalance your portfolio, as fund managers aim to maintain a good balance of investments between equity and debt funds. Thus, this helps you manage risk with returns. However, note that you can only shift between mutual fund schemes offered by the same fund house. Transfer between schemes of two fund houses is not allowed.

How Does SIP and STP Work?

Let’s understand how SIP and STP work with the help of an example.

1. SIP: Let’s say an individual Mr. X, wants to start investing for his long-term financial goal of saving for his child’s higher education. He invests Rs. 8,000 monthly in an equity mutual fund scheme through SIP. So, every month, Rs. 5000 will automatically be deducted from his bank account and invested in his chosen fund. This way, Mr. X would invest Rs. 96,000 in a year without worrying about timing the market.

2. STP: Let’s say Ms. B’s business generates a huge profit and she decides to take Rs. 3,00,000 from it and invest it for herself. She is looking to invest in an equity mutual fund but is worried about investing a big amount in one go due to market volatility. Instead, she decides to invest the money in a liquid fund with a fund house and set up a Rs. 20,000 STP every month towards an equity fund of her choice. With this approach Ms. B can systematically transfer her funds over 15 months and invest in equity funds, while minimising the risk of market fluctuations.

Difference Between STP and SIP

SIP vs STP: Which is Better?

The choice of investment approach between SIP vs STP can be tricky due to their different objectives. So, what is the difference between SIP and STP? Is STP better than SIP? Let's understand.

1. Strategy objective 

SIP is an investment plan through which you can invest a certain sum of money regularly in a mutual fund scheme of your choice. It is a systematic way of investing funds on a regular basis with the aim of long-term wealth creation. Investors typically invest in equity funds for the long term to gain higher returns.

STP, on the other hand, is a transfer plan that involves investing a lump sum amount in a mutual fund scheme called source fund and gradually transferring the investment to another fund. The amount is transferred with an aim to minimise market risk and generate returns by investing in a fund that is offering higher returns. It is a great way to reduce a potential risk from your investment.

2. Taxation

SIPs are tax-free as they involve investing in a mutual fund scheme. However, capital gains are applicable to fund redemption. So, the redemption is subject to taxation on short-term capital gains and long-term gains, depending on the investment duration.

In addition, you can also invest in an ELSS fund through SIP and claim a tax deduction of up to Rs. 1.5 lakhs under section 80C of ITA 1961.

However, STP investments are subject to taxation. Since every transfer amount is considered redemption from the previous mutual fund, the investment gains are subject to capital gains tax. Short-term capital gains are taxed at 15%, while long-term capital gains are taxed as per the individual tax bracket and annual income of the investor.

3. Suitability

SIP is suitable for investors who cannot invest a large amount in mutual funds at once. With SIP, investors with a long-term investment horizon can develop a habit of saving regularly and put small amounts towards the fund for wealth creation. SIP is typically preferred by investors looking to achieve specific investment goals in a fixed time.

STP investment approach is ideal for investors who are looking to shift to a different mutual fund scheme to minimise their investment risk. With this approach, investors can maintain a balance between risk and returns by diversifying the investment across equity and debt funds. Moreover, STP is also an excellent route for investors who want to invest their excess funds for capital appreciation.

Final thoughts

Ultimately, determining which is better, SIP or STP, can be difficult as both these investment approaches differ in their objectives, purpose, goals, and suitability. The choice of mutual fund plan depends on an investor's investment goals and needs.

If you're looking to invest regularly to generate wealth and achieve a long-term financial goal, investing through SIP will be a good choice for you. On the other hand, if you're invested in a mutual fund and want to shift to another one to lower your risks, you should go for STP to gradually transfer your investment. Visit the Tata Capital Moneyfy website to know more or download the SIP App.

FAQs

1. What is the benefit of STP?

STP (Systematic Transfer Plan) allows you to transfer funds from one scheme to another, helping you manage risk, optimize returns, and achieve diversification with investments in a mix of schemes.

2. What is the benefit of SIP?

SIP (Systematic Investment Plan) allows disciplined investing by spreading out investments over time, reducing market risk, and taking advantage of rupee cost averaging and compounding for better long-term growth.

3. Which STP is best?

The best STP depends on your financial goals, risk tolerance, and market conditions. Opt for STPs in mutual fund schemes that offer flexibility and match your desired asset allocation.

4. Which SIP is best?

The best SIP is one that aligns with your financial objectives, risk appetite, and investment horizon. You must choose SIPs in funds with a strong performance record and solid fund management.