SIP vs. STP: Which can earn you more money?

Rohit, who works in Gurugram, has made a significant profit from farming in his village. He wants to invest this amount in equity mutual funds but there is a confusion due to the stock market at record highs. He is unsure whether to make a lump-sum investment or do it gradually.

For people like Rohit, a Systematic Transfer Plan (STP) is a good option for investment. In STP, your entire amount is not invested in the equity fund all at once. Initially, the entire amount is invested in a liquid fund or a debt fund, and then it is gradually transferred to the equity mutual fund in installments through STP. The scheme where Rohit deposits the lump sum amount initially is called the ‘Source Scheme,’ and the equity scheme where the money transfer is done is called the ‘Target Scheme.’

What is STP? What are its benefits?

In mutual funds, STP is a method for transferring the invested amount from one scheme to another at regular intervals. Under this process, most people transfer money from a debt scheme to an equity scheme over a set period, which typically ranges from six months to two years.

STP also gives investors the flexibility to choose how often they want to transfer the amount—weekly, monthly, or quarterly, for example.

In essence, STP functions similarly to a Systematic Investment Plan (SIP) in mutual funds. Although with STP, transfer of money takes place from one scheme to another. Whereas in SIP, transfer of money takes place from the investor’s bank account to the fund house.

There is no entry load or investment fee for investing through STP. Investors must transfer funds to the target scheme at least six times, with no upper limit on the number of transfers.

So, what benefits will Rohit get from investing through STP?

For instance, if the Sensex is at 80,000 right now. Imagine if Rohit invests ₹10 lakh in an equity mutual fund immediately. If the market drops shortly after, he might face significant losses. Usually, a decline follows a market rally. STP helps avoid the risk of investing a large sum all at once. With STP, Rohit’s money will be invested at different market levels, which can help mitigate the risk of market fluctuations.

SIP vs. STP

Compared to a lump-sum investment, STP often offers the potential for better returns. With STP, you can earn returns from the source scheme as well as the target scheme.

Jitendra Solanki, a SEBI-registered investment advisor, says that predicting when and how much the stock market will rise or fall is challenging. For those who want to invest a large amount in mutual funds, STP is a better option. In a volatile market, investing in installments through STP is helpful. If you invest through STP, your investment will benefit from cost averaging. You will receive fewer units during a market rally and more units during a downturn. This can lead to better returns with lower risk.

Overall, the STP investment strategy in mutual funds is suitable for investors like Rohit, who want to invest a lump sum in the stock market amid its fluctuations. If you prefer to invest small amounts every month, then SIP would be a better option.