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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.
