SIP vs STP – Which is a Better Investment?

Understanding SIP

SIP stands for Systematic Investment Plan. It is a simple and thus popular way to make a mutual fund investment. Through an SIP, you can make regular contributions to a fund/ funds of your choice. The frequency could be weekly, monthly and so on. Once you start a SIP, the money is debited from your bank account and then invested in debt/ equity funds as per your specified preferences. A SIP is a commonly recommended way to invest in the money market. Let’s understand why.

Why Choose a SIP?

1. SIP allows you to start small. You can start investing with as little as ₹500 a month
2. You can easily get into the habit of disciplined and systematic savings
3. You give your money the chance to grow with the power of compounding
4. Rupee Cost Averaging helps in reducing market volatility
5. With a mixture of funds, you can diversify your portfolio
6. There is a SIP for everyone. Aggressive, moderate or conservative, everyone can invest in SIP.
7. SIP is flexible. You can pause, stop, increase or decrease your contribution as and when you want

Understanding STP

STP stands for Systematic Transfer Plan. Here, a fixed amount of money from one mutual fund is transferred to another on a regular basis. However, keep in mind that you are allowed to transfer money only within a mutual fund house. Funds cannot be transferred between two fund houses. With an STP, investors have the flexibility to transfer money in a regular and systematic manner.

For investors who have some surplus funds that they want to move from a liquid fund to a debt fund or vice versa, STP can be a worthwhile way to invest. Read on to know why.

Why Choose an STP?

1. You can make automatic transfers and move money between funds
2. Investors can reduce risk by shifting from high-risk to low-risk funds
3. With rupee cost averaging, the risk of a volatile market can be minimised
4. Can help in better fund management
5. STPs are customisable, as the investor decides the transfer frequency and amount
6. In STPs, when capital gains are managed correctly, they can be tax-efficient.

SIP vs STP: Which is a Better Investment?

When it comes to making an investment, unfortunately, there is no standard approach to follow. SIP and STP are two distinct investment options. And while you always have the option of going with both, when picking one, a careful analysis is required. Consider the following factors when making a decision.

• The first thing to consider is the type of plan that you have. Typically, SIPs are well-suited for investors with a longer investment horizon, and the primary aim is building wealth over time. Whereas STPs are ideal when you have a surplus lump sum that you want to invest. You may choose STP when the plan is to spread the risk.
• The choice you make also depends on the type of investor you are. For example, SIPs are more suited for you if you are a beginner investor or prefer saving consistently and regularly. For investors who understand the market shifts and wish to optimise their existing portfolios, STPs may be more attractive.
• The next important aspect to consider is taxation. SIPs are taxed every time you make a redemption. The capital gains that you make are taxed depending on how long you held the funds. The capital gains can be divided into short-term capital gains and long-term capital gains. For STPs, every transfer you make is considered a redemption. Therefore, all your withdrawal profits are subject to tax. Additionally, note that taxability can also depend on the types of funds you’ve invested in.

SIP vs STP: How to Make a Decision?

So, now we come to the real question: how to decide which of SIP and STP is better? By now, you would have understood that the decision depends on your investment goals, risk tolerance, and, of course, the time you wish to stay invested. If your income is regular, or you are a salaried employee with the goal of building a sizable corpus, then the obvious choice is SIPs. Even beginner investors who wish to start small should opt for SIPs.

On the other hand, if you have a lump sum amount that you are ready to expose to the market, or if you are a veteran investor who can make investment decisions strategically, then STPs may be for you.

In Conclusion

Whether you decide to side with SIPs or STPs, or do a little bit of both, Jio Insurance Broking strongly recommends that you make a well-informed decision. Ensure that you factor in all aspects, from your risk appetite to your financial goals, as well as taxation and current financial needs. Weigh the pros and cons of each before you make up your mind.