SIP vs STP: How the Vital Differences and Advantages Impact Investors
When it comes to investment in mutual funds, two popular ways are the Systematic Investment Plan (SIP) and the Systematic Transfer Plan (STP). Although SIP is widely popular and widely practiced among investors, STP is less frequent but possesses unique benefits. Both result in increasing wealth but serve distinct purposes and roles.
SIP, or Systematic Investment Plan, is a systematic and easy investment facility in mutual funds. An investor can invest a little amount of money at intervals, generally monthly, by using SIP. Investors can invest through SIP in different mutual fund schemes such as equity, debt, hybrid, and exchange-traded funds (ETFs). The rate of return on SIP investment that one can get varies between 12 and 14 percent but is subject to market fluctuations. As professional fund managers look after the investments, SIPs are safer compared to direct investment in the equity market. Investors with lower risks will be able to go for debt, hybrid, or ETF funds, which have relatively lower returns than equity funds.
STP, which stands for Systematic Transfer Plan, is not the same thing. It helps in transferring a specific amount of money from one mutual fund to another, generally from an equity fund to a debt fund. It is being done within a specified time period at regular intervals. The big reason for going in for STP is in order to cut down market risk. Since equity funds carry risk, the investor may find it suitable to shift the money to safer debt funds. Simply put, it is the same as lending money to a company, which is safer than investing in shares. Sometimes, investors also reverse apply STP. They invest a large sum initially in a debt fund and, after some time, transfer it to an equity fund. It minimises market fluctuation by spreading the risk over time.
While both SIP and STP are methods of investing in mutual funds, the difference lies in how they work. SIP is used for investment in a particular fund from time to time, whereas STP is used for transferring from one fund to another. In times of high risk in the market, STP can be even a better idea since it serves to shift investments from risky equity funds to risk-free debt funds.
In short, both SIP and STP are investor-friendly instruments, based on the investor’s requirements and market scenario. SIP is best for investors who like investing at regular intervals and incrementally growing money in the long term. STP is best for investors who like controlling market risk by changing investments in the long term. Both, used prudently, can help investors strike a balance between growth and safety in their investment time frame.
