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Your Money – SIP and STP: Which one is for you?

If the equity market is volatile, you may prefer STP to benefit from a better entry level through discipline even if you have the lump sum money.

There has been a lots of discussion on systematic investment planning (SIP) and its usefulness as an approach to investments. However, a systematic transfer plan (STP) does not get as much attention. Let us see what these two approaches stand for, and which one you should choose. To understand the suitability, we have to get the basics first.

In a SIP, you don’t have the money currently as a lump sum. You earn steadily, which may be in the form of salary, professional income, your own business, etc. Out of the future known earnings, you commit a certain amount to investments. The periodicity is usually monthly, as income is counted on a monthly basis. In mutual fund SIPs, the periodicity can be anything e.g. monthly, weekly, fortnightly, or quarterly. This is like an EMI; but rather than an expense, it is an investment.

Systematic Transfer Plan
In an STP, you have the money. Usually, in STP, the money is invested in liquid funds or other defensive debt funds and transferred to equity funds periodically. The rationale is, that rather than a one-shot entry into equity funds, a staggered entry is better. It has the benefit of cost averaging, as you are buying more equity when prices are relatively lower. This leads to discipline and eliminates the urge to time entry into the equity market. The concept of STP can work another way as well when you want to make your portfolio more defensive. You may shift periodically from equity funds to liquid or other defensive debt funds.

The similarity of SIP and STP is that of investment discipline. As mentioned earlier, it controls the urge to time the market. The difference is about the availability of investible money. In the case of STP, since the corpus is available with you, you can take your call on the entry i.e., one-time or staggered. However, if your investment horizon is long enough, you may even put it one shot. Here, you are not really ‘timing’ the market, in the sense you are not waiting for a lower level to enter. Over a long period of holding the investments, things tend to even out. If the equity market is volatile, you may prefer STP, to benefit from a better entry level through discipline, without taking a call on when the market level is expected to be lower.

Difference in Taxation
Another difference between SIP and STP is taxation. SIP is a method of fresh investments; taxation will occur only when you redeem or receive dividends, now known as Income Distribution cum Capital Withdrawal. In STP, though apparently, it is a transfer from one fund to another of the same AMC, it is technically redemption from the existing fund and investment into another fund. Hence, there is an incidence of taxation on the gains from the fund you are exiting. Since STP is usually from debt funds and the holding period would be less than three years, it is a short-term capital gains tax, taxable at your marginal slab rate.

Practically, the quantum of gains from the liquid / another defensive fund for a short holding period of a few months would not be as big as to change your decision to go for STP or one-time execution. However, if you are careful about these finer details and your holding period in the source fund is reasonably long, you may do the calculations for a perspective.

Conclusion
If the investment is from your future inflows — salary or professional income, then you have to do it through SIP. If you have the money lump sum, you may either keep it in a bank savings account and do a SIP, or invest in a defensive source fund and do an STP to the destination equity fund(s). The decision is between SIP, STP, and one-shot execution in the equity fund(s).

In a volatile market, staggered entry is better. If your investment horizon is very long, then you need not worry. Over the medium horizon, it may make a difference. Between SIP and STP, while there is a difference on taxation, if you park it in bank savings, that also is taxable. You may compare returns from bank savings with defensive debt funds e.g. liquid / ultra-short, and take the decision accordingly.

Source : Financial Express