Investing in mutual funds is one of the best ways to grow wealth over time. But when the stock market is declining or showing high volatility, many investors get confused about whether they should use Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP).
Both SIP and STP are strategies that help investors enter the market in a disciplined way. However, they work differently and are suitable for different types of investors and financial situations.
In this article, we will explain what SIP and STP are, their benefits, and which one is better for investing in mutual funds during a declining market.
What is SIP (Systematic Investment Plan)?
SIP is a method of investing in mutual funds where you invest a fixed amount at regular intervals—monthly, quarterly, or weekly. This approach helps in averaging out the cost of buying mutual fund units over time.
How SIP Works?
- You choose a mutual fund and decide how much you want to invest every month.
- On a fixed date, this amount is automatically deducted from your bank account and invested in the fund.
- You receive mutual fund units based on the prevailing Net Asset Value (NAV).
Example of SIP:
Let’s say you decide to invest ₹5,000 per month in an equity mutual fund through SIP. If the NAV is ₹50, you get 100 units. If the market declines and the NAV drops to ₹40 next month, you get 125 units. This is called rupee cost averaging, where you buy more units when prices are low and fewer when prices are high.
What is STP (Systematic Transfer Plan)?
STP is a process where you transfer a fixed amount from one mutual fund to another at regular intervals. Usually, investors first put a lump sum amount in a debt mutual fund (which is safer) and then systematically transfer small amounts into an equity mutual fund.
How STP Works?
- You invest a lump sum amount in a debt fund.
- A fixed amount is transferred to an equity mutual fund at regular intervals (weekly, monthly, or quarterly).
- This reduces the risk of investing all your money in the market at once.
Example of STP:
Suppose you have ₹3 lakh to invest, but the market is volatile. Instead of investing everything in an equity fund at once, you put the full amount in a debt fund. You then transfer ₹10,000 per month to an equity fund through STP. This helps you take advantage of rupee cost averaging while keeping your money relatively safe.
SIP vs STP: Key Differences
| Feature | SIP (Systematic Investment Plan) | STP (Systematic Transfer Plan) |
| Investment Mode | Invests from bank account | Transfers from debt fund to equity fund |
| Initial Investment | No lump sum required | Requires a lump sum investment in a debt fund |
| Risk Management | Spreads risk over time | Reduces risk of market timing |
| Cost Averaging | Yes, helps in buying more units at lower prices | Yes, reduces market timing risk |
| Who Should Use? | Salaried individuals investing monthly | Investors with a lump sum amount |
Which is Better in a Declining Market?
Now that we understand SIP and STP, let’s analyze which one works better when the market is falling.
1. SIP During Market Decline
SIP works well in a declining market because it follows rupee cost averaging. Since you invest regularly, you buy more units when the market is low. When the market recovers, your total investment grows in value.
Who Should Use SIP?
- Salaried individuals or people with regular incomes.
- Investors who don’t have a lump sum amount to invest.
- People who want to avoid timing the market.
Why SIP is Good in a Falling Market?
- Reduces the impact of short-term market fluctuations.
- Helps accumulate more mutual fund units at lower prices.
- Long-term investors benefit when the market rebounds.
2. STP During Market Decline
STP is more useful when you have a large sum to invest but don’t want to put it all in equity at once. If the market is volatile, keeping your money in a debt fund and gradually transferring it to an equity fund helps reduce risk.
Who Should Use STP?
- Investors with a lump sum amount (from a bonus, inheritance, or sale of an asset).
- People who want to reduce risk in a volatile market.
- Investors who prefer a balanced approach.
Why STP is Useful in a Declining Market?
- Keeps your money safe in a debt fund while the market is highly volatile.
- Ensures you don’t invest all your money at the wrong time.
- Transfers systematically, benefiting from cost averaging.
When to Use SIP or STP?
| Market Condition | Best Strategy | Why? |
| Market is stable | SIP | Regular investment, builds wealth steadily |
| Market is falling | SIP | Buy more units at lower prices |
| Market is volatile | STP | Reduces risk by gradual investment |
| Lump sum investment available | STP | Safer approach to investing in equity |
Key Benefits of SIP and STP
Benefits of SIP
✅ Affordable – You can start with as little as ₹500 per month.
✅ Builds discipline – Encourages regular investing.
✅ Reduces market timing risk – You invest at different price levels.
✅ Ideal for long-term wealth creation.
Benefits of STP
✅ Protects money from sudden market drops.
✅ Offers better returns than keeping money in a savings account.
✅ Ensures gradual exposure to equity.
✅ Helps manage market volatility effectively.
Final Thoughts
Both SIP and STP are smart ways to invest in mutual funds, but which one is better depends on your financial situation. If you have a regular monthly income, SIP is the best option as it allows consistent investment and benefits from market declines. On the other hand, if you have a lump sum amount, using STP will help reduce market timing risks by gradually shifting your money into equity.
Choosing between SIP and STP depends on your risk tolerance, investment horizon, and available funds. The key to successful investing is staying consistent and investing with a long-term perspective.
