Difference between Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP)

Systematic Investment Plan (SIP):

SIP is way of investing in Mutual funds monthly, where a fixed amount of money is invested in Mutual Fund. The SIP amount is debited from once bank account on specific dates (as set by investor). So, if investor wants to a SIP of 1,000 for 1 yr, it means that every month on a fixed date (chosen by investor) 1,000 will be invested in a Fixed Mutual fund of his/her choice. For small investor it is advisable to enter in stock market through mutual fund SIPs, Investment in SIP could be done together with systematic transfer (STP) from fixed-income schemes would be the best options as it will generate good returns over a long term.

Systematic Transfer Plan (STP): 

 In case of SIP, the amount is debited from your bank account for a new investment every month, while in case of in STP, the amount is transferred from one mutual fund scheme into another.

Investment by way of STP could be the best option when one wants to invest big lump sum money in stock market, as market is volatile and can go up or down very soon, so there is always a risk of losing a big part of investment, if after investing market goes down. As an investor everyone wants to minimize risk and get decent return. Hence, in STP lump sum amount of money is first invested in a mutual fund probably in debt fund and then a fixed sum is transferred from that mutual fund to another fund.

In case of SIP fund is monthly transfer from bank to mutual fund, whereas in case of STP fund can be transfer weekly, monthly or quarterly on the choice of investor.

Working of STP is in the way that, all money is actually invested first in a Mutual funds itself (probably Debt) and units from mutual fund in which money is first invested are sold every month and reinvested another Mutual fund (probably Equity) or vice versa.

Also, while there is no entry load for SIP, you may have to pay switching charges for STP.

Highlight points on STP

When to invest in STP:

 Investment in STP by way of DEBT to EQUITY is done when markets are very volatile and one don’t want to take risk with your money in a short span of time, This is still better than putting money in Bank and doing a SIP, because at least you money is earning some returns on debt part in STP.

When not to invest in STP:

When the markets are in rising trend i.e. at the end of correction in market, in that case STP will not deliver the best returns like SIP, one time investment is a good choice in that case. But then you never know that when will markets start go up. But mainly in case of retail investor as they do not have all tools and time to research the markets, it’s not advisable to invest lump sum in any case.