STPs: Best suited for small investors who want to stagger their investments in equity schemes

Systematic investment plans (SIPs) and systematic transfer plans (STPs) are somewhat similar in nature. Therefore, it is important to understand what distinguishes these investment plans, and how investors can access plans of their choice depending on their investment needs.

Systematic investment plans or SIPs allow an investor to make small periodic investments in a scheme (especially equity schemes) to build a sizable corpus over time. Essentially, from the perspective of the small investor, small amounts invested at frequent intervals help build a corpus to meet one`s financial goals. Importantly, SIPs compel an investor to invest across various cycles - be it bearish or bullish.

While it is financially prudent to invest when the stocks are low, psychological fear prevents one to invest in such times. SIPs, however, make it imperative for the investor to invest across various cycles, thereby enabling one to diversify across time periods. Such investment plans act as an anti-panic device as investors, even in a falling market, do not redeem in fright. Instead, they stay invested in the scheme because of the assurance that their future investments will get eventually invested at lower levels.

Systematic transfer plans (STPs) are similar to SIPs except that, instead of regular investments, the investor initially makes a one-time lump sum investment in a source fund, which would either be a liquid fund or a debt fund with low risk. The next step involves the asset management company transferring a fixed amount at specified intervals to a designated equity scheme on specific instructions by the investor. Fundamentally, investing in an STP is similar to investing in an equity scheme every month through an SIP.

This is how STPs actually work: An investor puts Rs 12,000 in the liquid or debt fund (source fund) with standing instructions to transfer Rs 1,000 for one year to the equity fund of his choice. At the time of transfer, mutual fund units equivalent to Rs 1,000 are redeemed at the source scheme with simultaneous allotment under the equity scheme - all at prevailing NAVs of the respective schemes.

STPs are, thus, best suited for those investors, who have a lump sum amount ready for investment but want to stagger their investments in equity scheme.