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What is the difference between a Systematic Transfer Plan and a SIP?

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What is the difference between a Systematic Transfer Plan and a SIP?Investing in mutual funds is now a very popular approach to build money. Investors use a variety of tactics while making MF investments. The Systematic Transfer Plan, or STP, is one such tactic. It has some fundamental variations from the Systematic Investment Plan (SIP), despite being somewhat comparable to it.

Systematic Transfer Plan

An automatic method of moving money from one mutual fund scheme to another is a systematic transfer plan. Investors who have a lump sum of money saved up but want to avoid market timing typically favour it.

Typically, with this method, investors move money from a debt plan to an equity plan.

How this works

Suppose an investor has a corpus of ₹10 lakh saved, but the markets are volatile and he doesn’t want to invest in an equity fund right now. So the investor invests the entire corpus in a debt fund which is considered safer than equity funds and usually gives a decent rate of return.

He then sets STP for his desired equity funds. So instead of money getting deducted from his bank account like in a SIP, the fund is transferred from his debt fund to his desired equity funds at regular intervals.

So in this scenario, he not only earns the interest rate offered by the debt fund, which is more than what the bank account offers but can also fix the amount he wants to transfer regularly (every month, every week) to his desired equity funds.

So the equity funds get a specific amount deposited at regular intervals like in the case of a SIP but only from a debt fund account instead of a bank account.

However, one must note that for this to work, you can only choose mutual fund schemes from the same fund house. The transfer can be done between 2 or more schemes of one fund house, not multiple fund houses. An investor can start an STP between 2 mutual fund schemes of Reliance Mutual Fund but not one mutual fund scheme of Reliance Mutual Fund and the other of Aditya Birla Sun Life.

Why should you invest in an STP?

The main advantage of starting an STP is to de-risk the market timing. Equity markets can be very volatile, so it may not always be a good idea to invest a lump sum amount. Investing on a regular basis increases returns in the long run due to the power of compounding.

This is why regular payments be it SIP or STP, are more common and effective than lump-sum payments for an equity mutual fund. In case of a large corpus is invested in an equity fund by the market crashes, your entire corpus will be subjected to the loss, however, in the case of an STP, this risk is cushioned since only a part of your money has been invested in the equity fund yet, so your entire corpus will not feel the pinch of such a loss.

Also, it is safer to invest a lump sum amount in a debt fund as your entire corpus will not face the impact of market fluctuations. This way the investor’s money is generating decent returns as well as getting regularly invested in equity funds.

Who should invest?

You should invest in an STP only if you have a huge corpus saved. If you get regular payments, you can choose the SIP route. Also, investors with low to medium risk appetites should choose SP, if you have a high-risk appetite, you can invest your lump sum in an equity fund. While the risks are higher, the return potential is more as well.

Amount and frequency

Once you have decided the debt fund you want to invest your lump sum money in, you can then choose your destination funds, the frequency at which you want the money transferred from your debt, and the amount for the transfers.

Options to transfer in STP re – weekly, monthly and quarterly.

Portfolio

Your portfolio for destination equity funds should be balanced, diverse as well as in line with your financial goals and risk appetite. If you are a low-risk investor, you can choose to transfer your funds from the debt fund to safe large-cap funds or index funds.

If you want a higher rate of return and are ready to take risks, you can choose either smallcap or midcap funds. Or you can also choose a mix of quality funds. Transfer little to large-cap funds, some to small-cap funds, sector funds to keep your portfolio diversified.

STP vs SIP

While both STP and SIP involve regular investments in equity mutual funds, in SIP the money comes from your bank account while in the case of STP, it gets transferred from your debt fund.

Also, STPs offer higher returns than SIPs, since you are also getting returns from your debt fund. Debt funds do not have a very robust rate of returns like equity funds but they generate decent returns of around 10 percent and are also safe from market fluctuation. In the case of STP, you get the benefit of debt fund returns. In the case of SIP, the bank account offers an almost negligible interest rate, so you do not get that benefit.

Thirdly, SIPs are usually open-ended. There is no defined time frame for investment. you can invest for as long as you want and withdraw whenever you like. This is not the case for STPs. In this, the amount, as well as the time period of transfers, are fixed. You have to choose the tenure for which you want the transfer to happen, say 6 months, on a monthly basis, then after 6 months, the transfers to your destination equity fund will stop.

The taxation is also very different in the case of SIP and STP. In the case of STP, every transfer from debt fund to equity fund is considered a redemption in the debt fund and hence you will be subjected to short-term capital gains tax. This is not the case in SIP.

In SIP, you will have to pay long-term capital gains tax and short-term capital gains tax depending on the tenure you hold your funds for.

STP is the best way of investing the lump sum in equity funds, especially during a volatile market environment. You not only get returns from the equity fund but the contribution of the debt fund is also pretty decent. However, if you do not have a massive corpus, SIP can be a better investment strategy for you.

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