SIP or STP: Millions of investors use SIPs (Systematic Investment Plans) to invest in mutual funds regularly, but few are familiar with STP (Systematic Transfer Plan). SIP involves investing a fixed amount in a mutual fund scheme at regular intervals, often monthly. In contrast, STP allows investors to invest a lump sum in a mutual fund, usually a debt fund, and gradually transfer it to equity funds at regular intervals. This process helps shift funds from low-risk schemes to higher-risk schemes like equity funds, enabling investors to manage risk more effectively while potentially earning better returns.
Key differences between SIP and STP
Under SIP, money is deposited directly from the investor's bank account to the mutual fund, thereby promoting disciplined investing without the need for a large initial amount. On the other hand, STP requires an initial lump sum investment in a debt fund, from which money is regularly transferred to an equity fund, allowing for strategic allocation adjustments over time.
| SIP | STP |
| Allows investors to invest a fixed amount regularly in a mutual fund scheme. | Allow investors to periodically transfer a predetermined amount from one mutual fund scheme to another over a period, typically from a debt fund to an equity fund. |
| Investors deposit a fixed amount into a mutual fund at regular intervals. | Investors initially park a lump sum amount in one fund and systematically transfer a fixed amount to another fund. |
SIP or STP: Advantages
SIP offers the benefit of rupee cost averaging, which helps reduce the impact of market volatility by buying more units when prices are low and fewer units when prices are high. Additionally, SIP is flexible, allowing investors to start with the smallest amount and adjust contributions based on their financial situation.
STP helps reduce market risks. Enhances returns by allocating assets based on the performance of the stock market. STP is especially beneficial for investors who have sufficient funds and want to gradually invest funds in equities, thereby reducing the risk of market volatility associated with lump sum investments. STP protects the investor from market volatility. STP also provides the investor with the benefit of rupee cost averaging. With the help of STP, the investor does not have to worry about the market fluctuations.
SIP or STP: What to choose?
Choosing between a SIP and an STP depends on your financial goals, risk appetite, and investment timeline. A SIP is ideal for those seeking long-term growth through small, regular investments, promoting disciplined saving. Conversely, an STP suits investors with a lump sum amount who wish to gradually increase market exposure while mitigating market volatility.
Key considerations include market conditions, tax implications, and your individual financial needs. Consulting a financial advisor can help customise your investment strategy to align with your unique circumstances and objectives.
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