Systematic Transfer Plan (STP)

Every investor is aware of Systematic Investment Plans (SIP) but may not be aware of the term Systematic Transfer Plan (STP). SIP is the transfer of money from a savings bank account to a mutual fund plan likewise STP means transferring money from one mutual fund plan to another.

What is STP?

An STP is a plan that allows investors to give consent to a mutual fund to periodically transfer a certain amount or switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house. STP is a smart strategy to stagger your investment over a specific term to reduce risks and balance returns.

Why to Do STP? What are the Advantages?

For investing a lump sum, you always want to invest at the lowest price. But unfortunately, knowing if the current price is high or low as compared to the future price is impossible.

So doing STP is to derisk the market timing. Investor can invests the lump sum in debt funds and sets STP to the desired equity fund. This way the investor’s money may get 8-10% returns while it is getting regularly invested in equity funds.

Say for example you want to transfer Rs.500000 from a liquid fund to an equity fund in 12 instalments with an expected return of 8%-10%.

Your Montly transfer will be Rs. 41666.667 and below you can see your amount after transfer, returns from liquid fund, equity fund and your Annualised returns.

Here are the benefits from STP:

Consistent Returns:

Through STP, you can transfer your money to a target equity fund while you are invested in a debt or liquid fund. Therefore, you will get the returns of the equity fund you are transferring into and at the same time remain protected as a part of your investment remains in debt.

Rupee Cost Averaging:

Like SIP, in STP too, a fixed amount of money is invested in the target fund at regular intervals. Since it is similar to SIP, STP assists in averaging out the cost of investors by purchasing more units at a lower NAV and vice versa.

Rebalancing Portfolio:

STP facilitates in rebalancing the portfolio by allotting investments from debt to equity or vice versa. If your investment in debt increases money can be reallocated to equity funds through an STP and if your investment in equity goes up money can be switched from equity to a debt fund.

Managing Risks:

An STP can also be used to move from a risky asset class to a less risky asset class. For instance, say, you initiated a SIP for 30 years into an equity fund for retirement planning. As you approach your retirement, you can start an STP to prevent loss of fund value. Here, you instruct the fund house to transfer a fixed amount from the equity fund to a debt fund. In this way, by the time you retire, you would have moved the entire accumulated corpus to a safer part.

Types of Systematic Transfer Plans:

Fixed STP: Here, the amount and frequency of transfer are fixed. Investors can take out a fixed amount as per their financial goal and apply for the same.

Capital Appreciation: For this kind of STP, only the profit part of the investment is transferred from source fund to the other fund, and the capital part remains safe.

Flexi STP: Flexi STP is flexible. This means you can choose to transfer a varied amount from the source fund to the target fund. Investors generally want the amount as per the market rate fluctuations. For instance, if the Net Asset Value of the destination fund decreases, then you can increase the amount and vice versa.

Conclusion:

STP is the best way of investing the lump sum in unpredictable markets without affecting your returns.

If you want to invest through a Systematic transfer plan, then GIIS financial can help you to choose one of the plans that suit your requirements. 

You can use Our Android App  for Investment, tracking and Asset allocation planning. 

*Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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