In recent years, mutual funds investment through the Systematic Investment Plan has grown increasingly popular. Other than SIP, however, several strategies can be used to invest and withdraw money in a systematic manner.
We will cover all you need to know about SIP and STP in this article. Also, the distinction between SIP and STP in order to determine which systematic procedures are appropriate.
SIP is a method of investing in mutual funds that is both disciplined and systematic. SIP allows investors to invest a fixed amount in any mutual fund scheme at regular intervals - weekly, monthly, quarterly, and so on. The little investment might be as little as INR 500. This aids in the long-term development of a corpus. On a predetermined day, the cash is automatically deducted from the investor's bank account. The fund management will allocate the equity or debt amount based on the mutual fund plan.
Investing in mutual funds through a systematic investment plan allows investors to keep track of their savings. Furthermore, SIP investors are unconcerned with market movements or market timing. It enables investors to stretch their investments out over time and averages their purchasing costs across market levels. As a result, they gain from rupee cost averaging and compounding power. Furthermore, investors can gain by keeping invested for a long time and without withdrawing money. Furthermore, investing in tax-saving plans, such as ELSS funds (Equity Linked Savings Scheme), through a systematic investment plan (SIP) provides a tax deduction of up to INR 1.5 lakhs under Section 80C. SIP returns can also be calculated using Motilal Oswal's SIP calculator.
An investor can transfer money from one mutual fund scheme to another using the Systematic Transfer Plan. However, money can only be transferred from one mutual fund house to another, not from one fund house to another. STP enables investors to transfer funds in a systematic and regular manner. Investors in the Systematic Transfer Plan invest a big payment in a fund (typically a debt fund) and subsequently transfer a fixed amount to an equity fund on a regular basis. Investors who have excess funds in their accounts can put them in a liquid fund or an ultra short term fund. This approach allows investors to earn a small profit on their lump-sum investment while shifting funds to an equity fund. Investors must also decide on the time frame for which they want to move money from one fund to another. They must also determine the amount to be transferred. STP is best for individuals who are hesitant to invest large sums of money in equity funds all at once.
Choosing between SIP and STP can be difficult at times. As a result, let us examine the distinctions between SIP and STP.
Individuals deposit a certain amount of money in a mutual fund scheme through a systematic investment plan (SIP). The funds are invested on a regular basis. SIPs in equities funds and for a longer time horizon are preferred by most investors.
STP involves investing a lump sum of money in a mutual fund scheme first (usually a debt fund). In the equity model, this money is transferred at regular periods. Even in this case, the amount of transfer and tenure is set in stone. Money is transferred from one scheme to another on a regular basis in other funds.
- Suitability of Investors
SIPs are ideal for individuals who are unable to put a large sum of money in mutual funds at once. It is perfect for people who want to invest a small amount of money on a monthly basis and have a long-term investment horizon. SIP is typically used by individuals who desire to attain a specific investing goal.
STP, on the other hand, is better for investors who have a lot of spare cash in their account. Furthermore, these investors are hesitant to invest their entire sum of money at once. As a result, investors can put their spare cash in a liquid fund and transfer a little amount of money into equities funds on a regular basis.
SIPs are tax-free because they involve a mutual fund investment. Individuals can also invest in an ELSS fund (Equity Linked Saving Scheme) to claim a tax deduction of up to INR 1.5 lakhs under Section 80C of the Income Tax Act, 1961. STPs, on the other hand, are subject to taxation. The money is transferred from a liquid fund to an equity fund in this step. As a result, each transfer is treated as a redemption (in the case of the liquid fund) and is subject to capital gains tax.
Short term capital gains (STCG) are applicable to equity funds if redemptions occur within a year of the purchase date. The STCG on equity funds is taxed at a fixed rate of 15%. Long-term capital gains are also applicable if the funds are redeemed after one year. If the gains exceed INR 1 lakh, LTCG is charged at 10%.
- Between SIP and STP, there is a substantial difference, as well as the investing goal. The primary concept behind mutual fund SIPs is to spread out investments over time. Additionally, putting money in a liquid fund or an ultra short term fund when it is idle can help investors earn a little extra. This is preferable than storing funds in a bank account. Furthermore, SIP and STP returns cannot be compared. Both have the advantage of rupee cost averaging. Investors do not need to be concerned about market swings in either of the systematic approaches.
- The reasons for using SIP and STP are also different. SIPs are ideal for long-term investors who want to invest on a regular basis. STP, on the other hand, can be used for the same purpose. However, one must put a big sum of money into a fund and then transfer it monthly for a set length of time. SIPs are better suited to investors who have a lump sum of money to invest. To preserve investment discipline, such investors can invest a small sum on a monthly basis. Investors who are hesitant to put their entire portfolio in a single equity programme, on the other hand, may select the STP alternative. This strategy allows them to spread out their lump-sum investment over time.
- Also, instead of worrying about transferring the correct amount each time, one can simply establish a transfer. In the end, any investment decision is based on the investor's financial goals. A sensible investment decision must be made based on one's financial plan.
There are numerous distinctions among mutual funds. As a result, investors must exercise caution while selecting investment opportunities. They should also be aware of the structure of the scheme before investing in it, as mutual fund investments are susceptible to market risk. They should also consider whether such an investing mode is appropriate for them. Keeping these factors in mind can assist investors in meeting their financial goals on schedule.