Systematic Transfer Plan (STPs) or Systematic Investment Plans (SIPs) are similar in the sense that they help to make regular investments at a fixed frequency. However, they are different in the way they function. We can understand both individually and the difference between SIP and STP.
1. SIP: SIPs are a form of investment in Mutual Funds. It lets the investor invest a fixed amount in any Mutual Fund Scheme at regular intervals, such as daily, weekly, monthly, quarterly, and more. It is more of a systematic and disciplined form of investment in Mutual Funds.
2. STP: STP is when an investor can transfer money from one Mutual Fund Scheme to another Mutual Fund Scheme of the same Fund House. With an STP, you pre-determine a fixed amount to be transferred from one Mutual Fund Scheme to another in a pre-set time frequency. This strategy is popularly used among investors when they have a lumpsum but want to stagger investing to reduce volatility.
Both these attributes are distinctive in nature therefore, we can understand SIP vs STP and how they work with some simple examples.
SIP Example:
An investor who wants to invest in a mutual fund in the form of a SIP will have to first choose the right mutual fund, select the investment frequency (e.g., every month), choose the amount he/she wishes to invest (say/e.g., Rs. 10,000), set up the Scheme and automatic debits from their bank account to the chosen fund. This enables Rs. 10,000 to be invested in the selected Mutual Fund Scheme through the SIP.
STP Example:
An investor has a corpus of Rs. 20 lakhs lumpsum- but the investor does not want to invest a lumpsum in equity funds as the markets are volatile. Therefore, he/she invests the entire Twenty lakhs in short term debt funds, which are relatively less volatile. Then, he/she can set up an STP for the fund, where money from her debt funds can be transferred into chosen equity funds at regular intervals.
STPs can only be set up with Mutual Fund Schemes from the same Fund House. The investor can choose to set up an STP with two or more schemes within one fund house. Investor should check for any exit load in the debt fund where the lumpsum has been invested.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
