Smart investing plays a key role in achieving long-term financial goals. Seasoned mutual fund investors understand the importance of building a well-balanced portfolio over time. However, many end up purchasing
units when market valuations are high, which can impact overall returns.
A more effective approach is to invest at varying price levels. Doing so helps average out the purchase cost and reduces the risk of entering the market at the wrong time.
SIP and STP: The Difference Between Them
But when it comes to investing many people confuse between two most popular investment options: Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs).
SIP: Systematic Investment Plans allows investors to regularly contribute smaller, fixed amounts, typically monthly or quarterly, into selected mutual fund schemes.
STP: Systematic Transfer Plan is a strategy that allows investors to transfer a fixed sum of money from one fund to another. This involves moving money from a liquid fund to an equity or a debt fund.
How Do SIPs Help Maximise Returns?
This approach encourages financial discipline while allowing investors to benefit from rupee cost averaging and the power of compounding over the long term.
Let’s understand this with a simpler example. Imagine you want to invest Rs 3 lakh in an equity mutual fund, but the market is currently at high levels. Your advisor suggests waiting, as prices may correct soon. However, you also don’t want to miss potential gains if the market continues to rise.
A smart solution is to invest the amount in smaller parts through a Systematic Investment Plan (SIP). Instead of investing the entire Rs 3 lakh at once, you spread it over several months. This way, you invest at different market levels, reduce the risk of entering at the wrong time, and still stay invested in your chosen fund.
Capital Gains Tax on SIPs
For SIP investments, capital gains tax is calculated using the FIFO (first-in, first-out) method, meaning the units bought first are considered sold first.
For equity mutual funds, long-term capital gains apply if units are sold after 12 months. For non-equity funds, long-term capital gains apply if units are sold after 24 months.
In simple terms, each SIP instalment is treated as a separate investment for tax purposes.
Experts Advise on Creating Long-Term Wealth Through Investment
Preeti Zende, Founder of Apna Dhan Financial Services shared, “Trying to time the market is not what allows you to create long-term wealth, whereas it’s how much time you were invested in the market. So, one should focus on being invested for as long as possible. And the best way to do this is through an SIP.”
The Role Of STP
A Systematic Transfer Plan (STP) is ideal for investors who want to rebalance their portfolio or shift money gradually into higher-return investments.
With an STP, you first invest a lump sum in a low-risk fund, such as a debt or liquid fund, and then regularly transfer a fixed amount to another fund, usually an equity fund.
For example, suppose you have Rs 3 lakh to invest in an equity fund but feel the market is expensive right now. Instead of investing all at once, you park the amount in a debt fund and set up an STP to transfer Rs 25,000 every month into the equity fund.
During the interim period, you can either park your funds in a fixed deposit or a debt mutual fund earning 7–8 per cent per year. From there, you gradually transfer the money to your target small-cap or equity fund. This structured transfer method is called a Systematic Transfer Plan (STP).
For retail investors, combining SIPs with STPs is the smartest approach. It helps average the purchase cost while earning returns on interim funds. Remember, disciplined investing and proper planning are key to building long-term wealth.
