The biggest difference between Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) is that SIP involves periodic investment of a fixed amount in a mutual fund scheme, while STP involves transferring investment from one mutual fund to another periodically.
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SIP Full Form In Mutual Fund
SIP stands for Systematic Investment Plan in the context of mutual funds. It is an investment strategy in which a person makes regular, usually monthly, fixed investments in a mutual fund scheme.
This approach offers several benefits. Firstly, it enforces disciplined saving by making regular investments a habit. Secondly, it helps average the cost of investing by spreading purchases over a period, mitigating the impact of market volatility. For instance, if Mr. Sharma invests Rs. 5000 monthly in an equity mutual fund via SIP, he can accumulate a substantial corpus over a long-term horizon, benefiting from the power of compounding and rupee cost averaging.
STP In Mutual Fund
STP, in the context of mutual funds stands for Systematic Transfer Plan. This method involves periodically transferring a fixed or variable investment from one mutual fund scheme (usually a debt or liquid scheme) to another (typically an equity scheme).
The benefit of an STP is that it enables the investor to balance risk and return. The invested capital remains safe in a debt fund while systematically moving into an equity fund to gain from potential market upswings.
For example, Ms. Verma has a lump sum of Rs. 1,20,000, which she initially invested in a debt fund. She can set up an STP to move Rs. 10,000 monthly into an equity fund, mitigating risk and leveraging market opportunities concurrently.
Difference Between SIP And STP
The primary difference between SIP and STP is that SIP is for people with a steady income because it involves making regular, fixed investments into a mutual fund scheme. STP, on the other hand, is used when an investor has a lump sum that they want to invest gradually into a fund, usually from a low-risk to a high-risk fund, to balance risk and possibly increase returns.
| Parameter | SIP | STP |
| Full Form | Systematic Investment Plan | Systematic Transfer Plan |
| Nature of Investment | Regular investment of a fixed sum | Transfer of investment from one fund to another |
| Risk Level | Depends on the fund chosen (Equity, Debt, etc.) | Generally lower as it allows balancing between high and low-risk funds |
| Use Case | Ideal for those with regular income | Suitable for lump sum investment to be transferred over time |
| Market Volatility | Helps in cost averaging, hence reducing impact of volatility | Helps in balancing risk and reward by adjusting exposure |
| Flexibility | Fixed amount at fixed intervals | Amount and intervals can be fixed or variable |
| Investment Funds | Single fund | Two funds involved |
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SIP Vs STP – Quick Summary
- SIP and STP are two different modes of investing in mutual funds. The former involves regular investments, while the latter involves transfers between funds.
- SIP stands for Systematic Investment Plan, emphasizing regular investments to build a habit of saving and average market volatility.
- STP, or Systematic Transfer Plan, is about investing a lump sum in one fund (usually low risk) and systematically transferring it to another (usually higher risk), ensuring a balance of risk and reward.
- The key differences between SIP and STP lie in their nature of investment. SIP involves investing a fixed amount in a mutual fund scheme, while STP involves switching mutual funds periodically.
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SIP Vs STP – FAQs
The primary difference between SIP and STP is that SIP involves making regular, fixed investments into a mutual fund scheme, making it suitable for those with a consistent income. STP, on the other hand, is used when an investor has a lump sum amount that they want to invest gradually into a fund, typically from a low-risk to a high-risk fund, to balance risk and potentially increase returns.
Yes, STP can be a beneficial strategy for mutual fund investment as it helps in mitigating risks associated with market volatility by balancing between low and high-risk funds.
No investment is 100% safe. The safety of a SIP investment in mutual funds depends on the type of fund, market conditions, and the expertise of the fund manager.
Choosing the right fund for STP depends on the investor’s financial goals, risk tolerance, and investment horizon. Typically, the source fund is a low-risk fund, and the target fund is an equity fund.
Yes, each transfer from one mutual fund to another in an STP is considered a redemption, and a new investment, therefore, could be subject to capital gains tax. It’s advisable to consult with a financial advisor or tax consultant to understand the tax implications better.
