SIP or STP..Confused?

With age the mutual fund industry has been churning out innovative products; some of them really useful and others just marketing gimmicks. SIP and STP are two such very helpful modes of mutual fund investment. Let's get to understand which of SIP and STP is right for your situation.

SIP is more popular than its derivative STP among mutual fund investors. But for those who are new to mutual fund investment we explain both in brief:

Systematic Investment Plan (SIP)

Using SIP mode you can invest fixed amounts in a mutual fund scheme of your choice in regular frequencies. The fund prescribes what the minimum investment amount is and you choose the amount you like in multiples allowed and also the frequency, say quarterly, monthly or in some funds even daily.

Systematic Transfer Plan (STP)

With STP method you can periodically shift funds lying in a certain scheme to another scheme managed by the same fund house. Again you decide the amount and frequency.

Is SIP or STP best for me?

Choose SIP for regular investments in fixed amounts

SIP is a good way of building discipline in mutual fund investment. It also offers benefits of cost averaging and compounding. You don't have to worry about the 'right time' to invest; SIP ensures you buy more units when shares are cheap and fewer when they are expensive. These terms are explained in the concept Systematic Investment Plan (SIP) De-jargoned.

Most importantly SIP makes investments in capital market for as small as Rs 100 possible. So you don't have to wait to accumulate enough amounts before starting to invest. You can select a good fund from the ones matching your investment goal and begin right away from the comfort of your home. Investment can be through debit card, net banking or giving a standing instruction at your bank.

Choose STP when lump sum funds are available for investment

STP is the tool to use when you suddenly have bumper funds in your hands and want to allocate them to equity mutual funds. Investing it at one go is not the best approach because if shares were overpriced on that day your returns in the end would have reduced by that extent. You need to invest it little by little, systematically, like you would have done through an SIP. 

But obviously part of your funds would be lying in a bank account (or any other safe place!) for the entire period where they wouldn't yield much. This is where an STP comes really handy. You can read more about this inSystematic Transfer Plan (STP) De-jargoned.

In an STP you can invest lump sum in debt funds and then transfer them systematically to the equity fund of your choice. Debt funds invest in debt securities but since they are linked to capital markets their yields can be higher than fixed deposits.