In the dynamic world of investment, choosing the right strategy is paramount for achieving financial goals. Two popular methods that often come into consideration are Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP). Both have their merits and suit different investment objectives.

SIPs enable investors to commit to regular investments in a chosen mutual fund scheme, fostering discipline and consistency in building their portfolios over time. On the other hand, STPs offer a structured mechanism for reallocating funds between various mutual fund schemes, allowing investors to capitalize on market opportunities and manage asset allocation dynamically.

Let’s delve into the comparison to determine which might be the better option for you.

Understanding Systematic Investment Plan (SIP)

SIP is a method of investing a fixed amount regularly in mutual funds. Investors commit to investing a predetermined amount at regular intervals, typically monthly. It’s a disciplined approach that helps in averaging the purchase cost over time, known as rupee-cost averaging. This strategy tends to mitigate the impact of market volatility, as more units are bought when prices are low and fewer when prices are high.

Let’s take an example,

Meet Sameer, a young professional with a keen eye on his financial future. He decides to embark on the SIP journey by investing a fixed amount every month in a mutual fund. Sameer understands that the market can be unpredictable, so he appreciates the beauty of rupee-cost averaging.

Suppose Sameer invests 10,000 every month in a mutual fund through SIP. Some months, the market is bullish, and he gets fewer units for his 10,000. But during market downturns, his 10,000 fetches more units. Over time, this averaging effect smoothens out the impact of market volatility, potentially resulting in significant growth over the long term.

Understanding Systematic Transfer Plan (STP)

Systematic Transfer Plans (STPs) are investment strategies offered by mutual funds. They allow investors to periodically transfer a fixed or variable amount from one mutual fund scheme to another. The transfer could be from a debt fund to an equity fund, or vice versa, depending on the investor’s risk appetite and market outlook.

This investment strategy is preferred by investors who want to invest lump sum amounts but want to avoid market timings and minimise the risks that come with investing in equity funds.
Here the fund where the amount is initially deposited and transferred from is called the source scheme or transferor scheme, and the fund where the amount is transferred to is the target scheme or destination scheme.

Moreover, funds can only be transferred between schemes operated by a single asset management company (AMC) or fund house. Hence transferring funds between multiple schemes offered by several different companies cannot be done with a systematic transfer plan.

Let’s see how STP has the two ways of transferring funds.

– Debt to Equity Transition

Suppose you want to invest Rs15 lakhs, but the markets are too volatile to invest in an equity fund. You can instead invest the entire amount into a debt fund, which is safer and then set up an STP to transfer a percentage of your lump sum amount to your desired equity funds at regular intervals every week or every month. This way, you earn the additional interest rate offered by the debt fund, which is higher than bank account interest rates, and in case the market crashes, the risk is cushioned since only a part of your lump sum has been invested in the equity fund.

– Equity to Debt Transition

Imagine you’ve been investing in an equity mutual fund to capitalize on market growth but now seek to diversify and reduce risk by allocating some funds to a debt instrument. Through a Systematic Transfer Plan (STP) you can transfer the sum from the equity-oriented fund into debt fund at regular intervals every week or every month. This disciplined approach shields you from abrupt market downturns while steadily positioning a portion of your investments in a more conservative asset class, aligning with your evolving financial objectives and risk profile.

 Types of Systematic Transfer Plan

– Flexi STP: This type of STP provides flexibility to vary the sum, which will be moved based on personal monetary goals and market situations. You can easily regulate the frequency or the transfer sum based on your market position and risk appetite.

– Capital Appreciation STP: The capital appreciation STP gets relocated in a systematic way to another fund. Investors who want to lock in revenues from a certain scheme and reinvest them in high-growing options can choose this technique.

– Fixed STP: This type of STP lets the investors move a fixed sum from one mutual fund to another regularly. It offers a well-organised method of investing and is ideal for people who wish to uphold a reliable savings approach.

 The Key Differences: SIP vs STP

Choosing the Investment Option?

Each investment journey – whether it’s through SIP or STP – offers its own set of advantages. Here’s a quick guide to help you choose your path:

– SIP: If you prefer a steady, disciplined approach and appreciate the concept of averaging out market fluctuations, SIP might be the way to go.

– STP: STPs are a better option for lump sum investments since only a portion of your lump sum is transferred to the equity fund. Your total investment amount won’t suffer a loss during market crashes.

 Conclusion:

SIP and STP are both valuable investment strategies with distinct benefits. While SIP offers a disciplined approach with rupee-cost averaging, STP provides flexibility in adjusting asset allocation. Ultimately, the choice between SIP and STP depends on your investment goals, risk tolerance, and market outlook. Remember, the key to successful investing lies in consistency, discipline, and aligning your strategy with your financial goals.

We at RichVik, also guide the clients throughout their investment journey for optimization of wealth creation vis a vis market condition.

To understand more on the topic as well as to start investments please feel free to contact us:

Phone: +91-9324609115

E-mail: team@richvikwealth.in

The article is authored by Mr. Saurabh Gosavi from Team RichVik.