Systematic investment planning (SIP) and its value as a method of investing have received a lot of attention. Systematic transfer plans (STP) do not, however, receive as much attention. Let’s examine the principles behind these two strategies and determine which one you ought to use. We must first learn the fundamentals in order to comprehend appropriateness.
In an SIP, you don’t have the money currently as a lump sum. You consistently make money, whether it is from a paycheck, a job, your own business, etc. You invest a particular sum of the anticipated future earnings. Since income is calculated on a regular basis, the periodicity is often monthly. The periodicity in mutual fund SIPs might be monthly, weekly, fortnightly, or quarterly, for example. This is comparable to an EMI, except instead of being a cost, it is an investment.
Systematic Transfer Plan: You have the money in a STP. Typically, in STP, the funds are placed in liquid funds or other defensive debt funds and then periodically moved to equity funds. The argument is that a staggered entry into equity funds is preferable to a single entry. Because you are purchasing more equity when prices are substantially cheaper, it provides the benefit of cost averaging. Discipline results from this, and the desire to timing your entry into the equities market is eliminated. When you wish to make your portfolio more defensive, the idea of STP can also be applied in a different way. You could occasionally switch from liquid or other defensive debt funds to equity funds.
SIP and STP are similar in that they both emphasise investment discipline. As was already noted, it restrains the desire to time the market. The difference lies in the amount of investable money that is available. Since you have access to the corpus in the case of STP, you can decide whether the entry should be made all at once or over time. However, you might even put it in one shot if your investing horizon is sufficiently long. Since you are not watching for a lower level to enter, you are not really “timing” the market in this instance. Things usually balance out after keeping the investments for a while. You might prefer STP if the equity market is erratic in order to gain advantage of a higher entry level through discipline.
Difference in taxation: Taxation is another distinction between SIP and STP. SIP is a mechanism for making new investments; taxation only applies if you redeem your investments or earn dividends, which are now referred to as Income Distribution or Capital Withdrawals. Although it appears that STP is a transfer from one fund to another within the same AMC, in reality it is a redemption from one fund and an investment into another. As a result, the gains from the fund you are leaving are subject to taxation. STP is short-term capital gains tax, which is taxable at your marginal slab rate because it is typically from debt funds and the holding period is less than three years.
In reality, the gains from liquid or other defensive funds over a little holding period of a few months would not be sufficient to alter your decision to choose STP or one-time execution. You may perform the calculations for a perspective, though, if you pay attention to these little aspects and have a lengthy holding period in the source fund.
Conclusion
You must use SIP if the investment is being made using money that you will get in the future, such as a salary or professional income. If you have the money in one lump sum, you can either invest it in a defensive source fund and execute a STP to the target equity fund, or you can retain it in a bank savings account and do a SIP (s). The equities fund decision is between SIP, STP, and one-shot execution (s).
Staggered entrance is preferable in a volatile market. You need not be concerned if your investment horizon is very long. It might have an impact in the medium term. While there is a tax difference between STP and SIP, if you park it in bank savings, it is also taxable. You can weigh defensive debt funds, such as liquid or ultra-short, against returns from bank deposits to make your choice.
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