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What is a Systematic Transfer Plan, and How is it Different from an SIP?

Mutual funds investments have grown in popularity over the last few years and are widely used to generate wealth. As a matter of fact, India’s Average Assets Under Management (AAUM) of the Indian Mutual Fund Industry for June 2023 stood at ₹44,82,314 crores.
 

However, today’s investors are more reluctant to invest lump sum amounts due to the market’s volatility and other potential risks that come attached to it. This is where a systematic transfer plan comes into play.

It is similar to an SIP (Systematic Investment Plan) but meant for lump sum investments. They also have other key differences that we will get into in our blog. So to find out which investment plan you should pick, keep reading!

What is a Systematic Transfer Plan?
 

Systematic transfer plans or STPs are used by investors to make intra-fund transfers. For example, if you want to move funds from a debt fund to an equity fund, you will use STP. It is an automated way of transferring your funds between mutual fund schemes.
 

This investment strategy is preferred by investors who want to invest lump sum amounts but want to avoid market timings and minimise the risks that come with investing in equity funds.
 

Here the fund where the amount is initially deposited and transferred from is called the source scheme or transferor scheme, and the fund where the amount is transferred to is the target scheme or destination scheme.
 

Moreover, funds can only be transferred between schemes operated by a single asset management company (AMC) or fund house. Hence transferring funds between multiple schemes offered by several different companies cannot be done with a systematic transfer plan.

Example of How an STP Investment Works
 

Say you want to invest ₹15 lakhs, but the markets are too volatile to invest in an equity fund. You can instead invest the entire amount into a debt fund, which is safer and then set up an STP to transfer a percentage of your lump sum amount to your desired equity funds at regular intervals (every week or every month).
 

This way, you earn the additional interest rate offered by the debt fund, which is higher than bank account interest rates, and in case the market crashes, the risk is cushioned since only a part of your lump sum has been invested in the equity fund.
 

Remember, you can only choose mutual fund schemes from the same AMC/fund house. For example, you can start an STP between two mutual fund schemes of Nippon India Mutual Fund but not one mutual fund scheme of Nippon India Mutual Fund and the other of Aditya Birla Sun Life.

What is a Systematic Investment Plan?

SIPs or systematic investment plans are where an investor invests a fixed amount of money into a mutual fund scheme at regular intervals (every week/month/quarter).
 

This is a popular way to invest in mutual funds as it ensures you regularly invest in them regardless of market conditions. Hence you buy fewer units when the market rises and more units when the market is low.
 

For more information on SIPs, read our blog on Step-by-Step Guide to Invest In an SIP.

STP Vs SIP: Key Differences

Parameters 

Systematic Transfer Plan (STP)

Systematic Investment Plan (SIP)

Definition 

An investment strategy where a fixed amount is automatically transferred between mutual funds at regular intervals under the same AMC.

An investment strategy where a fixed amount is transferred at regular intervals to one or several mutual fund houses/AMCs. 

Use Cases

Investors opt for STP investments to transfer funds between debt to equity funds to minimise risks from market volatility.

Usually opted for when an investor wants to invest in equity funds in multiple AMCs. 

Investment Source

The source scheme

Bank transfers 

Returns 

STP investments offer higher returns since you also get returns from your source fund.

Lower returns than STP since you only get interest from your SIP investment(s) and bank account. 

Tenure 

Open-ended with no time frame. You can invest as long as you want and withdraw any amount whenever you like.

Has a fixed tenure that you must choose before starting your SIP plan. Must withdraw the full amount.

Taxation*

Every transfer from the debt fund to the equity fund is subjected to short-term capital gains tax*.

Must pay long-term capital gains tax* or short-term capital gains tax*, based on the tenure

Ideal For 

Investors with a large corpus who want to invest a lump sum into equity funds during volatile market conditions.

Investors who do not have a large corpus but want to start investing. 

SIP Vs STP: Which is Better?

STP investment strategies are perfect if you have a large corpus but want to minimise the effects of market crashes and volatility. They are also recommended for investors with high-risk appetites since lump sum investments offer higher returns.
 

STPs are also a better option for lump sum investments since only a portion of your lump sum is transferred to the equity fund. Your total investment amount won’t suffer a loss during market crashes. 
 

SIPs are perfect if you do not have a large corpus but want to start investing. So if you get regular payments, you can choose SIP investments. It allows you to invest in equity and debt funds for a fixed tenure with a fixed amount. 
 

Apart from STP and SIP, there is another popular investment option — a ULIP# or Unit Linked Insurance Plan. A ULIP# can be bought as an online life insurance policy. It is a life insurance coverage that invests some portion of the premium in stocks, bonds and mutual funds. If this sounds interesting to you, you may consider browsing through Tata AIA Life Insurance Policy and plans and find the right plan for you.

Conclusion
 

Your investment strategy must factor in your requirements, circumstances and end goals. So when it comes to SIP Vs STP differences, SIPs are good for investors with low to medium-risk appetites, while investors with high-risk appetites should go for STPs.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions (FAQs)

Who is eligible for STP investments?

To opt for a systematic transfer plan, you must do at least six capital transfers from one mutual fund to another. While there is no entry load, the Securities and Exchange Board of India (SEBI) allows AMCs to charge an exit load. However, the exit load cannot exceed 2%.

What types of STPs can I invest in?

You can invest in Fixed STP, Capital Appreciation, or a Flexi STP investment plan.

What is the minimum STP investment amount?

While there is no standard minimum investment amount that you must invest in your source fund, some AMCs require a minimum amount of ₹12,000 for their systematic transfer plans.

Disclaimers

Generic disclaimer

  • Insurance cover is available under the product.
  •  The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

Other disclaimers

  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • Guaranteed/Guarantee: 1Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry
  • ULIP#:
    • IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER
    • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
    • Past performance is not indicative of future performance.
    • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
    • Please make your own independent decision after consulting your financial or other professional advisor.