Is SIP better than STP?

Mutual fund investing has become simpler and convenient than how it was several years ago. Back in the day, the only investment option available for investors was making a one time lumpsum investment. If you were investing in equity funds, lumpsum investing would expose your entire investment amount right from the beginning of the investment cycle. Your equity portfolio tends to get affected depending on market fluctuations and you might even have to face losses in falling markets. However, ever since the introduction of easy investment plans like SIP and STP, investing in mutual funds have become possible for even those who do not have a large capital to start investing.

But what exactly is STP and SIP? What is the difference between these two? Which one is better?

SIP (Systematic Investment Plan)

A Systematic Investment Plan is an easy and hassle free way of investing in mutual funds. It is way better than lumpsum investing as investors can invest small amounts at regular intervals instead of making a large investment. If you are new to mutual fund investing, SIP might help you gradually build your mutual fund corpus. Investors need to complete a one time mandate with their bank and complete their KYC documentation with the fund house for starting a SIP in mutual funds. Once you decide how much amount you want to invest at regular intervals, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to the fund. One doesn’t even have to manually visit the fund house for making their monthly SIP investments.

STP (Systematic Transfer Plan)

Systematic Transfer Plan or STP is a type of investment plan where the investment amount gets transferred from one mutual fund scheme to another scheme (generally from a poor performing scheme to abetter performing scheme). As mutual fund investments are subject to market risk and returns are never guaranteed, a STP helps an investor transfer his /her mutual fund investments from one scheme to another depending on the volatility in the market. For example, if the equity markets are under performing for a consistent period of 6 to 8 months, with STP investors can transfer investments made in their equity funds to debt schemes. Another good thing about STPs is that when the markets become normal and you want to shift your finances back to better performing funds you can do so without having to worry about anything.

What is better STP or SIP?

While STP is ideal to navigate volatile markets, SIP is ideal for long term investment. Also, if you are investing for the long run you don’t have to worry about falling markets. Even in the past, even though markets have collapsed, they have normalized and eventually offered better capital appreciation. This is far better than STP where all you get to do is transfer your investments from one scheme to another. However, investors need to determine their investment objective and understand their income needs before determining whether they want to invest in mutual funds via SIP or STP. STP might be ideal risk averse investors who do not wish to expose their finances to market volatility. On the other hand, SIP might be ideal for those with a long term investment horizon who wish to inculcate the discipline of regular investing. SIP investors tend to benefit from power of compounding as well. Compounding refers to the interest earned on the interest earned on the initial investment amount.

SIP has several advantages over SIP;however, investors should remember that mutual fund investments do not guarantee returns. Hence, it is better to consult a financial advisor before investing.