SIP is one of the popular investment options nowadays. But do you know that STP is also a way of investing in Mutual Funds. Let us tell you what is STP and how different it is from SIP.

SIP vs STP: SIP has become a popular way of investment these days. People invest in Mutual Funds through SIP. Most experts believe that this market based scheme can give better returns than all other schemes. The average return in the long term is considered to be around 12%. But do you know that STP is also a way of investing in Mutual Funds. Let us tell you what is STP and how different it is from SIP.

SIP

As we all know that in SIP i.e. Systematic Investment Plan, investors invest a fixed amount at fixed intervals.

SIP offers various options like daily, weekly, monthly, quarterly etc. This is a systematic way of investing in mutual funds. In long term SIP, tremendous advantage of compounding can be taken.

STP

STP means Systematic Transfer Plan. Like SIP, this is also a way of investing in mutual funds. In STP, investors invest a lump sum amount in a mutual fund scheme (usually debt fund) and then transfer it to equity schemes at a regular interval. In simple words, STP is a SIP which is done from one mutual fund to another.

How does STP work?

If you have Rs 1 lakh and you want to invest in equity fund through Systematic Transfer Plan, then for this you will have to find a liquid fund or debt scheme and put the entire Rs 1 lakh in that scheme.

Now suppose you invest your money in a debt fund. At the same time, you also decide a fixed period in which your amount will be transferred to equity.

Suppose you have to transfer Rs 10,000 every month. So your amount of Rs 1 lakh will be transferred from the debt fund to the equity fund in 10 months in increments of Rs 10,000 each. In this way, the money is transferred from one mutual fund to another in a systematic way. Usually, it is advisable to choose this plan when you want to invest a lump sum amount in equity fund, but want to avoid the fluctuations associated with it.

SIP or STP, which is better to choose?

SIP and STP both are systematic methods of investment. Both offer the benefit of rupee cost averaging.

However, the objectives of both are different. SIP is better for those investors who want to create a big fund by investing small amounts systematically over a long period of time instead of a lump sum amount. On the other hand, those investors who are hesitant to invest their entire money in an equity scheme at once can choose the STP option. Investing lump sum money in equity can be risky. Overall, the decision of which one to invest in between SIP and STP depends on the financial goal of the investor. For this, you can make a decision by taking advice from a financial expert.