When we talk about making an investment, the very first thing that comes to our mind is mutual funds. These are counted as the best way to start your investment journey, as it provides a well diversified portfolio according to your risk appetite and financial goals.
There are mainly two ways of starting an investment through mutual funds, through disciplined investment or via lump-sum amount. Investors prefer to invest through disciplined investment adopting the route of systematic plans. But, to pursue that path as well, there are various options to invest like systematic transfer plan and systematic investment plan. Let’s break the difference into 5 pieces and understand which one is the best for you.
On one hand, SIP means investing a particular amount in a mutual fund scheme at a predetermined date. In every transfer, your fund manager will buy more units of stocks or debts funds, as per your risk-taking capacity.
On the other hand, STP means transferring a particular amount in one mutual fund scheme to another mutual fund scheme at a predetermined date. This is done to change your investment according to your risk appetite. For example, ₹10,000 transfer from equity oriented mutual funds to hybrid mutual funds.
In the case of SIP, there would be no entry load charged by the AMC, you will only have to pay exit load and tax when you sell your mutual fund units based on long-term or short term category.
While in the case of STP, you have to pay an exit load charged by the AMC every time to transfer the mutual funds unit from one scheme to another. Also, every time to sell, it would be considered as sale, so you have to pay short-term capital gain tax as well.
Rebalancing your portfolio
In the case of SIP, you first have to invest in a mutual fund scheme and your fund manager will create a portfolio according to your financial requirements. If your portfolio is not giving desired return, all you can do is withdraw all your money by selling all the units you have bought so far.
While in the case of STP, it provides you the benefits of automatic rebalancing of your portfolio. You do not have to spend time on an interval basis to review your portfolio.
For instance, if you are currently investing in equity oriented funds, now your retirement is approaching and you do not want to take risks. STP will strategically transfer your funds into a debt-oriented mutual fund scheme to give you the exposure of debt funds.
SIP and STP are fundamentally different investment schemes, but you can use both of them at different stages of investing in your financial life. You can stay invested in SIP schemes for a longer period of time and start STP based on your financial objective when you want a change in risk-appetite and return on your investments. Using multiple mutual fund schemes for availing the advantages side of the respective schemes help you in optimising your portfolio and returns.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com