SIP vs STP: What is the difference between these two mutual fund investments, explained!

Investments in mutual funds soared significantly and the numbers of demat accounts have also been increasing, as per AMFI data for the month of January 2024. According to a recent report by brokerage Motilal Oswal, the overall number of demat accounts grew to 139 million in December 2023, with new account additions reaching 4.2 million during the same time. In FY23, monthly additions averaged roughly 2.1 million. 
 
A systematic investment plan (SIP) is a popular method of generating income through mutual funds. SIP allows an investor to invest a predetermined amount regularly in a cycle. One such approach is the systematic transfer plan (STP). While it is similar to the SIP, there are several notable distinctions.

What is STP? How does it work?

It transfers a predetermined amount of money from one mutual fund to another on a regular basis. An STP is commonly used to transfer money from a liquid or debt fund to an equity fund. This averages an investor's purchase price in the stock fund, reducing risk. For example, one can transfer Rs 5,000 per month from Axis Liquid Fund to Axis Bluechip Fund.

SIP vs STP: Which one you should use?

SIP and STP are both systematic and strategic ways to invest in and withdraw from mutual funds. One can select between the two based on their requirements.

Benefits of SIP

Compounding 
The proceeds from an SIP are reinvested back into the fund, and this long-term investing method serves to build the corpus.
 
Rupee cost averaging
Investing in an SIP allows you to average out the cost per unit over time by buying more when the NAV is low and less when it is high. This is termed rupee cost averaging.
 
Easy to start
Investing in a SIP is straightforward. You can start investing with as little as Rs 100.

Benefits of STP

Safe
Liquid or debt funds often provide 3-4 per cent higher returns than savings accounts or fixed deposits. When combined with the greater return of an equity fund, investors can benefit from an STP and optimise their earnings. It is consistent and safe.
 
Minimising risk
Using an STP, investors can shift assets from a riskier to a less risky asset class during a period of extreme volatility, or vice versa, in a rising equities market. Therefore, STP is a good option to choose for mutual funds.
 
Balanced portfolio
For risk-taking investors, STP is a better option. They can transfer their investments from equities to debt funds or vice versa. However, a growing portfolio requires a combination of equities and debt securities.

SIP vs STP: Which one is better? Know what experts' say

Nikunj Saraf, vice president, Choice Wealth, says, "Choosing between SIP and STP hinges upon an investor's financial objectives, risk tolerance, and investment horizon. SIP caters well to individuals aiming to amass wealth over an extended period through a structured and consistent investment strategy, often favoured by employees looking to build a nest egg gradually. On the other hand, STP is better suited for those seeking to manage risk by gradually diversifying investments across different asset classes. It is particularly favoured by investors who possess a lump sum but prefer to spread their investments systematically, steering clear of the pitfalls of timing the market and mitigating the potential impact of market corrections."

According to Raghvendra Nath, MD, Ladderup Wealth Management, "Choosing between SIP and STP depends on individual financial objectives. SIP is suitable for investors who prefer periodic, long-term investments, whereas STP while serving a similar purpose, requires an initial lump sum investment with subsequent periodic transfers. SIP is ideal for those without a large lump sum but who want to maintain investment discipline, while STP is better suited for those who wish to stagger their lump sum investment into an equity scheme. Ultimately, the decision depends on an individual's financial plan and objectives."