Through the Systematic Investment Plan, mutual fund investments have become more and more well-liked in recent years. The good thing about investing in mutual funds is that in addition to the various advantages they provide, they also let you automate your deposits and withdrawals, allowing you to invest and profit from your assets in a methodical manner.
However, a number of other techniques may be employed to make systematic investments and withdrawals of cash in addition to SIP. One such tactic is a systemic transfer plan. To better understand the significant distinctions between the two plans, let us discuss each aspect in detail. However, before that, let's quickly go through SIP and STP.
What is a systematic investment plan?
A structured Investment Plan, often known as a SIP, allows you to invest a little quantity on a monthly basis in your favourite mutual fund plan. By setting up a SIP, a certain sum is automatically taken out of your bank account each month and invested in the mutual fund of your choice.
With a SIP, your investment is spread out over time as opposed to a lumpsum payment. As a result, you don't need a sizable sum of money to begin investing in mutual funds. When you invest through a SIP, you are compelled to set money away on a regular basis, which will help you develop financial discipline in the long term.
What is a systematic transfer plan?
STP refers to moving moving funds from one mutual fund plan to another and is a wise way to spread out your investment over a set period of time in order to lower risks and balance returns.
It makes it possible to transfer money between two mutual fund schemes in a disciplined and organized manner. Investors often start a STP by moving money from a debt fund to an equity fund. Although it is a smart move, you should be aware of the transfer's tax ramifications and exit charges.
SIP Vs STP
SIPs are the best option for people who can't invest a sizable chunk of money in mutual funds at once. It is ideal for those with a long-term investing plan who wish to invest a little sum of money each month. SIP is frequently employed by those who want to achieve a certain financial goal.
For investors with a lot of extra money in their accounts, STP is preferable. Additionally, some investors are apprehensive about investing their full amount at once. As a consequence, investors may stash their extra money in a liquid fund and routinely move a little sum into equity funds.
SIPs are tax-free since they entail investing in mutual funds. Under Section 80C of the Income Tax Act of 1961, individuals may invest in an ELSS fund and get a tax deduction of up to INR 1.5 lakhs. STPs, on the other hand, are taxable. This phase involves moving the funds from a liquid fund to an equity fund. Each transfer is therefore regarded as a redemption (in the case of the liquid fund) and is taxed on capital gains.
Rupee cost averaging, the power of compounding, and a disciplined approach to investing are some of the key benefits of SIP. However, some benefits of STP include predictable returns, cost averaging, and portfolio rebalancing.
Before making an investment, people should also be aware of the plan's organizational structure because mutual fund investments are exposed to market risk. They should determine whether such an investing plan is appropriate for them as well. It is important to make wise investment decisions based on one's financial strategy.