Difference between Lumpsum vs STP

Doing an STP implies the ability to anticipate a market peak, as this is the only situation where utilizing an STP method would be preferred over a lump-sum investment.
Lumpsum vs STP
3 min
23-May-2024

The fundamental difference between lump sum and Systematic Transfer Plan (STP) lies in their approach to market timing. Choosing STP means you believe you can pick the best times to invest when the market is high. STP spreads out your investment over time, hoping to catch those high points. On the other hand, with lump sum, you put all your money in at once, without trying to pick the best moment. So, the decision between lump sum and STP depends on how confident you are in your ability to predict market highs. If you're not sure about your timing skills, it might be smarter to stick with lump sum.

Investing in mutual funds is seen as a practical way to diversify your portfolio and gain access to different asset classes.

You can use different strategies - among which the two most popular are lumpsum and STP or systematic transfer plan (STP). This Lumpsum vs STP article delves into the definitions, differences, and comparative advantages of each, helping investors make informed decisions based on their financial goals and market conditions.

What is lump sum in a mutual fund?

Lumpsum investment as the name suggests is when an investor invests a large sum of money in a mutual fund in one go. It is a straightforward investment strategy that is ideally adopted when an individual has a significant amount of cash to be invested.

Investors generally opt for lumpsum investments when the markets are expected to rise steadily which in turn maximises returns potential in the long run.

What is a Systematic Transfer Plan (STP) in mutual fund?

The Systematic Transfer Plan (STP) is an investment strategy used by investors to mitigate risk without compromising on steady returns.

The investor will park their money in an ultra-short-term or highly liquid fund as a first step. Then steadily a predetermined amount of money will be transferred in regular intervals generally to an equity-oriented fund that has the potential to generate higher returns.

STP gives safety due to its initial low-risk fund, followed by growth potential after its transfer to the equity markets.

Differences between a lump sum and STP

Both these methods require periodic investments, but their purpose and strategies vary significantly. Based on these differences you can select STP or Lump Sum to meet your financial needs:

Feature Systematic Transfer Plan (STP) Systematic Investment Plan (SIP)
Definition A method where an investor transfers funds from one mutual fund to another, typically from a low-risk fund (like a liquid fund) to a higher-risk fund (like an equity fund). A method where an investor makes regular, fixed investments directly from their bank account into a mutual fund.
Purpose To mitigate risk by gradually moving investments to potentially higher return funds. To build investment gradually over time, helping inculcate a habit of disciplined saving and investing.
Source of investment Initially invested in a safer fund, and then transferred to another fund. Direct investments are made from the investor’s finances periodically.
Risk mitigation Starts with investment in a lower-risk profile and gradually increases exposure to higher risk. Distributes investment over time, potentially reducing the risk associated with market timing but always subject to market conditions.
Investment flexibility Provides flexibility to adjust the transfer amount and intervals depending on market conditions and investor preferences. Fixed investment amounts at regular intervals, with some flexibility in adjusting the SIP amount or pausing the plan.
Market timing Reduces the risk of poor market timing by spreading out the exposure to volatility. Reduces the impact of market volatility over the long term, but each installment is subject to current market prices.
Return potential Can optimize returns by strategically timing the transfer from lower to higher return funds. Aims to average the purchase cost over time, leading to higher returns through cost-averaging


Why is STP better than investing in lump sum?

As mentioned in the table above, STP reduces risk by spreading investments to mitigate adverse market swings as compared to lumpsum investments.

With STP you can buy more units when the prices are low leading to better returns in volatile markets.

In contrast to a lump sum, STPs are more flexible in terms of the investment amount and can be revised based on personal financial goals and market volatility.

Which one to choose between lump sum vs STP?

Choosing between an STP or Lump Sum depends on the investor’s financial situation, risk tolerance, market timing, and investment goals. A lump sum may be suitable for those who believe the market has a strong upside potential and are comfortable with the associated risks. STP, on the other hand, may appeal to those seeking to mitigate risks and who prefer spreading their market entry over time.

Conclusion

So in the debate of lump sum vs STP, it is important to understand that both these strategies have pros and cons. Deciding which strategy to adopt depends on defining your financial ambitions, understanding market conditions, and your risk appetite. The lumpsum method is ideal for investors with a high-risk tolerance and confidence in market timing to ensure significant returns when the markets are on a high. STP is a more cautious strategy that relies on diversification and timing to mitigate risk. It is ideal for investors looking for a gradual entry into the market.

Whichever strategy you adopt, the Bajaj Finserv Mutual Fund platform can be your trusted ally in your investment journey. It offers lump sum calculators and SIP calculators to ensure you can estimate your returns and plan investments accordingly.

The convenient and easy-to-use Bajaj Finserv Mutual Funds Platform boasts over 1,000 mutual funds schemes. It also allows for easy mutual fund comparison and selection, making it an excellent resource for both novice and experienced investors.

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Frequently asked questions

Is STP better than lumpsum?
STP is often considered better than a lump sum investment for those who prefer to mitigate risk and potentially smooth out returns over time, especially in volatile or uncertain market conditions.

Is it better to invest lump sum or monthly?
A lump sum investment might suit those with a large amount of capital and confidence in market timing, while monthly investments, or SIPs, offer a lower-risk approach by spreading out investments and reducing the impact of market volatility.
Which is better lumpsum or SIP?
Whether a lump sum or SIP is better depends on your risk tolerance and financial situation: lump sum can maximize returns in rising markets, while SIP reduces risk by spreading investments over time.
Is STP a good option?
STP (Systematic Transfer Plan) is a good option for investors looking to balance risk and return by gradually transferring investments from lower-risk funds to higher-risk funds. It allows for strategic market entry, risk mitigation, and potential capital appreciation over time.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.