SIP in mutual funds has been increasingly popular in recent years. Several techniques, in addition to SIP, may be used to invest and withdraw money in a systematic way. As a consequence, a systematic investment plan may be created using the Systematic Withdrawal Plan & Systematic Transfer Plan.
Systematic Investment Plan
SIP) is a disciplined and systematic approach of investing in mutual funds. SIP enables investors to invest a specified amount in a mutual fund scheme on a weekly, monthly, quarterly, or annual basis. It is possible that the little investment may be as low as Rs 500. This is beneficial to a corpus’s long-term growth. The money is automatically debited from the investor’s bank account on a certain day. The equity or loan amount will be distributed according to the mutual fund plan by the fund management.
Using a systematic investment strategy to invest in mutual funds helps investors to keep track of their money. In addition, SIP investors are bothered with market fluctuations or market timing. It allows investors to spread their investments over a longer period of time and average their purchase expenses across market levels. As a consequence, rupee cost averaging and compounding power benefit them. Furthermore, by staying invested for a long period and without withdrawing money, investors may benefit. In addition, investing in tax-saving schemes like ELSS funds via a systematic investment plan qualifies for a tax deduction of up to INR 1.5 lakhs under Section 80C.
Systematic Transfer Plan
The STP allows an investor to shift money from one mutual fund plan to another. Money may only be moved from one mutual fund house to another, not between mutual fund houses. STP allows investors to make regular and systematic transfers of cash.
The Systematic Transfer Plan (STP) requires investors to make a large initial deposit in a fund (usually a debt fund) and then transfer a specified amount to an equity fund on a regular basis. Surplus money in an investor’s account might be invested in a liquid fund or an extreme short-term fund. This strategy enables investors to earn a little return on a lump-sum investment while simultaneously transferring cash to an equity fund. Investors must also determine how long they want to transfer money from one fund to another. They must also decide on the transfer amount. Individuals who are apprehensive to invest big quantities of money in equity funds all at once might use STP. Furthermore, investors may put a big sum of money into an equities fund and expect to get monthly distributions.
Systematic Withdrawal Plan
Another approach to withdraw money from a mutual fund programme is via a systematic withdrawal plan, or SWP. The polar opposite of SIP is SWP. Investors may withdraw a specified amount of money at regular intervals after putting a lump sum payment in a mutual fund programme. This withdrawal is a steady source of income for many individuals.
Key Differences between SIP and STP
| Parameters | SIP (Systematic Investment Plan) | STP (Systematic Transfer Plan) |
| Type of Plan | A strategy for investing | A strategy for transferring funds |
| Mechanism | Regularly allocates a predetermined sum from the investor’s bank account into a specific mutual fund scheme. | Periodically shifts funds from one mutual fund to another within the same fund family. |
| Objective | Aims for long-term growth of capital. | Seeks to enhance capital by utilizing surplus funds not actively needed. |
| Tax Implications | Investments are not taxed, but capital gains tax is applied upon withdrawal, either as short-term or long-term capital gains. | Each transfer is taxable since it’s considered a redemption from the initial mutual fund, incurring potential tax liabilities. |
| Benefits | Employs the power of compounding, dollar-cost averaging, and promotes a steady investment habit. | Offers stable returns, allows for adjustment of the investment portfolio, and utilises dollar-cost averaging. |
Which is Better Investment between STP and SIP?
Let’s simplify and differentiate between SIP and STP to make it easier to understand their distinctions:
- Type of Investment Plan:
SIP: Here, you put a fixed amount into a mutual fund at regular times. It’s like saving a part of your income every month into a fund, often chosen for equity investments over many years.
STP: First, you put a big sum into a mutual fund (usually one that’s safer like a debt fund). Then, regularly, you move a set part of that money into another fund, often an equity fund. This lets you gradually invest in riskier funds over time.
- Who Should Consider Which?
SIP: People who don’t have a large amount to invest all at once. It’s ideal for saving a little bit consistently, especially if you’re looking at the long haul and have specific goals.
STP: Those with extra cash they don’t need right away. Instead of putting it all into riskier investments at once, you can start with a safer fund and move small amounts to riskier ones over time.
- Tax Implications:
SIP: Generally, investing through SIPs doesn’t attract direct taxes. Plus, if you choose certain funds like ELSS, you can even get a tax break under Section 80C up to ₹1.5 lakhs.
STP: When you move money from one fund to another in STP, it’s seen as selling (redeeming) from the first fund, which may lead to taxes. If you move your investment before a year is up, you’ll pay a short-term capital gains tax at 15% for equity funds. After a year, long-term capital gains tax kicks in at 10% for gains over ₹1 lakh. For debt funds, short-term gains (less than 3 years) are taxed as per your income tax rate, and long-term gains (over 3 years) are taxed at 20% without indexation. However, starting April 1, 2023, gains from debt funds are taxed according to your income slab, without the long-term capital gains benefit.
How should you choose between SIP vs STP?
There is a significant difference between SIP vs STP, as well as the investment aim. The main idea behind mutual fund SIPs is to spread out investments over a longer period of time. Additionally, placing money in a liquid or highly short-term fund while it is idle may help investors make a little additional money. Rather than keeping money in a bank account, this is a better option. Furthermore, results from SIP and STP cannot be compared. The rupee cost averaging benefit is available to both. In any of the systematic procedures, investors do not need to be worried about market volatility.
SIP and STP are also used for other purposes. SIPs are perfect for long-term investors who wish to make consistent investments. STP, on the other hand, maybe utilized to accomplish the same goal. However, putting a large sum of money into a fund and then transferring it monthly for a certain period of time is required. SIPs are best for investors with a large lump sum of money to invest. Such people could invest a little amount on a regular basis to maintain their investment discipline.
Those who are cautious to place their whole portfolio in a single equity programme, on the other hand, may opt for the STP option. They may stretch out their lump-sum investment over time using this method. Furthermore, rather than worrying about transferring the necessary amount each time, one may just set up a transfer. Finally, each investment decision is made based on the investor’s financial objectives. Based on one’s financial plan, a prudent investment decision must be made.
Final Thoughts
There are a few differences between mutual fund schemes. As a consequence, while selecting investment possibilities, investors must use prudence. They should also understand the plan’s structure before investing, since mutual fund investments are subject to market risk. They should also assess if such an investment strategy is suitable for them. Keeping these considerations in mind might help investors accomplish their financial objectives on time
Mutual Fund Calculators:
| SIP Calculator | Lumpsum Calculator |
| SWP Calculator | Step Up SIP Calculator |
| Mutual Fund Returns Calculator | ELSS Calculator |
FAQs
Is SIP better than STP?
Whether SIP is better than STP depends on the investor’s goals and financial situation. SIP suits regular small investments, while STP is ideal for transferring lump sums into different funds over time.
What does STP mean in SIP?
STP stands for Systematic Transfer Plan, which in the context of SIP, involves periodically transferring investments from one mutual fund to another within the same fund house.
How to invest in STP?
To invest in STP, start with a lump sum investment in one mutual fund, usually a debt fund, then set up regular transfers to another fund, often an equity fund, to balance risk and returns.
Why is STP better?
STP might be better for those with a lump sum to invest, offering a way to gradually enter the market and potentially reduce risk through systematic transfers and strategic asset allocation.
