SIP vs STP: What Is the Difference?

You set a fixed amount, a date and a fund. Every month the amount is debited from your bank and invested.

It suits anybody with a regular income, because it turns saving into an automatic habit. Our page on SIP investment covers how it works, and our page on SIP autopay covers the bank mandate.

You first invest a lump sum in one scheme, called the source. Usually this is a liquid or short-term debt fund, where the value moves very little.

Then you set an instruction to move a fixed amount from that scheme into another, called the target, every week or month. The target is usually an equity fund.

So the whole amount is invested from day one, but it enters equity slowly. Our page on the systematic transfer plan covers the details.

SIP: from your bank account, each month, out of income.

STP: from money already invested, moving between two schemes of the same fund house.

That also means an STP only works within one fund house. You cannot run an STP from one AMC liquid fund into another AMC equity fund.

When you are investing from a salary or regular income.

When you do not have a large amount available now.

When you want a long-term habit that runs for years without decisions. Our page on the best time to start a SIP covers getting started.

When you already have a large amount: a bonus, a property sale, a maturing deposit, retirement money or an inheritance.

Putting all of it into equity on one day means your whole result depends on that day price. An STP spreads the entry over months, which lowers that risk. Our page on investing a windfall covers the wider plan.

Meanwhile, the money waiting in the liquid fund is not sitting idle in a savings account.

It also removes a lot of worry. Many people who receive a large amount keep it in the bank for months because they cannot decide on the right day to invest. An STP takes that decision away: you pick the plan once, and the entry happens on its own schedule.

Yes, and many people do.

A common pattern is a SIP running from salary, plus an STP for a one-time amount such as a bonus. They are separate instructions and do not interfere with each other.

Our page on SIP versus lump sum discusses the lump sum side, and the STP is effectively the middle path between the two.

Each STP transfer is technically a redemption from the source fund and a purchase in the target fund.

That means exit load may apply on the source side if it has one, although most liquid funds have little or none beyond the first few days. Each transfer can also have tax effects, since it is a sale. Our pages on exit load and mutual fund taxation cover the structure. For your own tax position, check with a tax adviser.

A SIP has no such transfer, so it is simpler on this front. For most salaried investors that simplicity is a real advantage, and it is one reason SIPs are the default choice.

Five steps, all within one fund house.

• Invest the lump sum in a liquid or short-term debt scheme of that fund house.
• Pick the target scheme, usually an equity fund of the same house.
• Choose the amount and frequency, weekly or monthly.
• Choose the number of transfers, which sets how long it runs.
• Submit the STP instruction online or on a form.

Check the scheme documents for the minimum transfer amount and minimum number of transfers, as each fund house sets its own.

The transfers then happen automatically. You do not need a bank mandate for an STP, because the money is already invested.

An STP can also run the opposite way, from equity into a safer fund.

When a goal such as a child college fees is two or three years away, moving money out of equity in steps protects it from a fall at the wrong moment. Doing it gradually means you are not guessing one single day to exit.

This is one of the most useful and least used tools in mutual funds. Our page on saving for a child education discusses timing this move.

Long enough to cover a few ups and downs, short enough that too much money does not wait in debt for years.

Many people, especially first-time investors with a large amount, choose somewhere between six months and two years, depending on the size of the amount and how nervous they are about timing. There is no perfect answer, and our page on arbitrage versus liquid funds covers where the waiting money can sit.

• SIP = monthly income into a fund.
• STP = a lump sum moved into equity in steps.
• Salary? Use a SIP.
• Bonus or sale proceeds? Consider an STP.
• Both can run at the same time.

If you have a lump sum and want help planning the transfer, get in touch.