SIP vs STP: Understanding Key Differences and Strategies

by Alina Khan

Published On Jan. 17, 2024

In this article

There are two approaches to investing, SIP (Systematic Investment Plan) and STP (Systematic Transfer Plan). These investment strategies serve as pillars for investors, offering distinct pathways to optimize their financial journey. We will look at the fundamental disparities between SIP and STP, unraveling the intricate mechanisms that define each. Understand individual benefits and understanding the scenarios wherein each strategy excels, investors can glean valuable insights to make informed decisions tailored to their unique financial goals and aspirations.

Systematic Investment Plan (SIP):

SIP: The Systematic Way to Wealth Accumulation

Systematic Investment Plans (SIPs) are a disciplined and structured approach to investing in mutual funds. It allows investors to contribute a fixed amount at regular intervals, typically monthly. This systematic approach to investment provides a host of benefits, especially for those looking to mitigate the impact of market volatility and achieve long-term financial goals.

How SIP Works:

  • Regular Contributions: Investors commit to investing a fixed sum of money at regular intervals, usually monthly. This amount is automatically debited from their bank accounts.

  • Rupee Cost Averaging: SIP adopts the principle of rupee cost averaging. When markets are down, the fixed investment amount buys more units, and when markets are up, it buys fewer units. Over time, this strategy helps in reducing the average cost per unit.

  • Power of Compounding: The longer the investment horizon, the greater the potential for compounding returns. SIP harnesses the power of compounding by consistently reinvesting returns.

  • Flexibility: Investors can start a SIP with a relatively small amount and have the flexibility to increase or decrease the investment as per their financial circumstances.

  • Professional Fund Management: SIP investors benefit from professional fund management, as their money is pooled with that of other investors and managed by experienced fund managers.


Suppose an investor starts a SIP of INR 5,000 per month in a mutual fund with a Net Asset Value (NAV) of INR 20. In the first month, they would purchase 250 units (INR 5,000 / INR 20). If the NAV increases to INR 25 in the second month, the investor would purchase 200 units (INR 5,000 / INR 25). This process continues, ensuring a disciplined and systematic investment approach.

Systematic Transfer Plan (STP):

STP: Transitioning Funds with Precision

STP is another strategic approach that involves transferring a fixed or variable amount from one mutual fund scheme to another at predetermined intervals. This strategy is particularly useful for investors with a lump sum amount who wish to enter the market gradually or shift funds between different asset classes.

How STP Works:

  • Lump Sum Investment: The investor initially invests a lump sum amount in a debt fund or a liquid fund, which is generally considered less volatile than equity funds.

  • Periodic Transfers: A fixed or variable amount is then systematically transferred from the debt or liquid fund to an equity fund or another fund of choice at regular intervals.

  • Risk Mitigation: STP allows investors to mitigate the risk associated with investing a large sum in the equity market at one go. It provides a phased entry into equities, reducing the impact of market fluctuations.

  • Asset Allocation: Investors can use STP to strategically allocate their assets based on market conditions and their risk appetite.

  • Tax Efficiency: In certain scenarios, STP can be tax-efficient. Capital gains tax is triggered only when the money is transferred from the debt fund to the equity fund.


Consider an investor who has a lump sum amount of INR 1,00,000. Instead of directly investing in an equity fund, they opt for STP. They decide to transfer INR 10,000 every month from a liquid fund to the chosen equity fund. This systematic transfer allows for a smoother entry into the equity market.

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Key Differences Between SIP and STP:

    Primary Objective:

    • SIP: Primarily used for regular and disciplined equity investment over the long term.

    • STP: Aimed at managing the timing and risk associated with moving funds between different asset classes.

      Asset Allocation:

      • SIP: Directly involves investing in the chosen mutual fund.
      • STP: Involves the initial investment in a debt or liquid fund before transferring to the target fund.

        Investment Horizon:

        • SIP: Suited for long-term goals with a consistent and disciplined investment approach.

        • STP: Offers flexibility for short, medium, or long-term investment objectives, depending on the chosen funds.

          Risk Exposure:

          • SIP: Exposes investors to market volatility but uses rupee cost averaging to mitigate risk.

          • STP: Aims to manage risk by strategically transferring funds between asset classes.

            Tax Implications:

            • SIP: Each SIP installment is treated as a separate investment for tax purposes.

            • STP: Capital gains tax is triggered only when funds are transferred from debt to equity.

            Choosing Between SIP and STP:

            The decision between SIP and STP hinges on a careful consideration of individual financial goals, risk tolerance, and investment horizon.

            • Investment Goals: For investors with a long-term horizon and a goal of wealth creation, SIPs offer a time-tested approach. The power of compounding and rupee cost averaging can work in their favor over the extended investment period.

            • Risk Appetite: Investors seeking a more nuanced and tactical approach may find STP appealing. The ability to manage risk through strategic transfers aligns with a dynamic market outlook and changing risk appetite.

            • Combination Strategy: Some investors adopt a combination strategy, using SIPs for their core long-term investments and STPs for tactical adjustments based on market conditions.

            When to Choose SIP:

            • For investors looking to build wealth over the long term.

            • Those seeking the benefits of rupee cost averaging.

            • Individuals with a regular and steady income who can commit to monthly investments.

            When to Choose STP:

            • Investors with a lump sum amount looking to enter the equity market gradually.

            • Those wanting to manage the risk associated with market volatility.

            • Individuals with a strategic asset allocation plan.

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            Wrapping Up:

            In the dynamic world of mutual fund investments, SIP and STP emerge as valuable tools, each catering to distinct investor needs. SIPs lay the foundation for long-term wealth creation, leveraging the principles of compounding and rupee cost averaging. STP, on the other hand, offers a strategic approach to portfolio management, allowing investors to navigate the market with precision and manage risk through systematic transfers.

            Ultimately, the choice between SIP and STP depends on the investor's financial objectives, risk tolerance, and investment horizon. Whether the goal is long-term wealth creation or tactical portfolio management, understanding the unique benefits of SIPs and STPs empowers investors to craft a strategy aligned with their individual needs and market outlook.

            Read these articles to learn about key investment methodologies and concepts related to SIPs & Investment Advisors that can help you setup your portfolio:

              1. SIP Investment Guide: What is SIP, How to Start, Benefits, & Is It Worth It
              2. What is SIP in Mutual Funds? An Experts Guide
              3. Navigating the Challenge: How to Deal with Loss-Making SIPs
              4. Maximizing Portfolio Potential: The Role of an Investment Advisor
              5. Best SIP to Invest In Now for Maximum Returns: A Strategic Guide for Indian Investors
              6. Comprehensive Guide on Starting & Stopping SIPs: What are Perpetual SIPs in India?
              7. SIP vs. Lumpsum Investment Strategies: Comprehensive Guide for Best Returns

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