Difference between SIP and STP Explained in simple way

Systematic Investment Plan and Systematic Transfer Plan Differences Simplified

Demat accounts are increasing along with the Mutual Funds’ investments in the form of Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) having also been growing considerably, according to the AMFI data for January 2024.

Records suggest that the overall demat accounts increased to 139 million in December 2023 with fresh demat accounts touching 4.2 million in the same timeframe itself. The monthly creations averaged around 2.1 million in FY23.

What is a Systematic Investment Plan?

A systematic Investment Plan (SIP) is a process to generate income through mutual funds. The SIP enables an investor to put a set amount of money periodically within a cycle. One of the very prominent approaches is the Systematic Transfer Plan (STP), which is quite like the SIP, however, it has a few differences.

So, what is STP and how it works?

STP, which transfers money from a debt fund or a liquid to an equity fund, is a process of transferring a preset amount of money from one mutual fund to another periodically. For example, one can transfer Rs 4000 per month from Axis Bluechip Fund to Axis Liquid Fund.

Systematic Investment Plan vs Systematic Transfer Plan – which one you must opt for?

STP and SIP, both of them are systematic ways to invest and withdraw money from the funds. Customers can choose among the two based on their needs.

Advantages of SIP

Compounding

The profits generated from the SIP can be reinvested into the fund. It helps to build a long-term corpus.

Easy to Start Investing

In a SIP, one can begin investing with even a small amount like Rs 100.

Rupee Cost Average

SIP enables the customer to average out the cost per unit over time by purchasing more when the NAV is low and a lesser amount whenever it is high.

Advantages of STP

Secured

Debt funds or liquid generally offer 3-4% more returns compared to fixed deposits or savings accounts. When joined with an equity fund better return, the investors generate profit from the STP. So, it is very safe.

Reducing the Risk Factor

Investors can transfer the assets from a more risky to a lesser threatening asset set during volatilities. Hence, STP is a good option.

SIP vs STP – Which is better? Learn what one of the experts say

MD of Ladderup Wealth Management Raghvendra Nath says that the choice between STP and SIP relies on the financial goals of the individual. SIP is perfect for those investors who go for long-term, periodic investments. On the other hand, STP needs a lump sum amount at first with regular transfers. SIP does not require a large amount, so it is a good option for everyone. However, STP is more apt for those who want to invest a lump sum amount in an equity scheme. So, the choice boils down to the financial goals of the individual.