Most mutual fund investors are familiar with the term Systematic Investment Plan (SIPs). The profound theory is that since we cannot time the stock markets to perfection, we should invest small amounts in mutual funds every month, which is called SIPs.
Difference between STP and SIP?
1) In the case of a SIP, you bring fresh money into a scheme along, while in the case of an STP, you just transfer from an existing fund.
2) One of the other differences would be that in the case of STP it would generally be moving money from a liquid fund to a equity fund.
In the case of SIP, you could allocate fresh money to either a debt dedicated scheme or a equity scheme.
3) Another difference between SIP and STP is the transaction charges. Usually in the case of a Systematic Investment Plan there is a transaction charge that would be applicable beyond a certain sum. In the case of Systematic Transfer Plan as well there is a transfer charge that becomes applicable.
These include an exit load and also all taxes that are applicable.
Which is better STP or SIP?
There is really a big difference between both and the objectives of these are also very different. You can go for an STP, when you believe that the markets have fallen and hence want to make a systematic switch over a period of time from debt to equity.
However, in a rising market it would not make sense to allocate money to Systematic Transfer Plans from debt to equity. You have to carefully think of your choices.
The objectives in an SIP is not to time the market, but, to invest in a more systematic way, irrespective of whether the market is trading higher or lower.
In case of a Systematic Transfer Plan as well the objective is totally different. It is to move money in a systematic way from one scheme to another, mostly every month.
We advocate that you check your own priorities, before you invest through either of the means. It is best to seek professional help before you invest.
2015 and the beginning of 2016 has not been particularly good for those who did Systematic Investment plans as the markets have kept on falling. So, you have nought at higher rates and now are now sitting at losses, as the markets have made a continuous loss.