What is STP

A guide to the fundamentals of a Systematic Transfer Plan

Key Takeaways

A Systematic Investment Plan or STP allows money transfers from one mutual fund to another.
You can transfer money from debt funds to equity funds and vice versa.
The AMC sells units from one fund and uses that money to purchase units of another fund.
STP involves exposing small amounts to equity to reduce market risks.
STP helps you rebalance your portfolio and earn high returns.

Introduction

As an investor, you may constantly seek innovative ways to keep up with the changing market trends. The goal is to invest in securities that help grow your corpus. One of those ways is to invest through a Systematic Transfer Plan (STP). Here, you can protect your investments by investing in mutual funds that are safe while exposing only a small portion of your investment to fearsome equities. The goal is to invest in securities that help grow your corpus. Find out what is STP and how it works.

What is Systematic Transfer?

An STP in a mutual fund is a way to transfer money from one mutual fund scheme to another. E.g., investors invest a lumpsum amount in a debt mutual fund. In an STP, you can gradually transfer this money from the debt fund to an equity fund or vice versa.

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How Does STP Work?

Let us say you wish to earn high returns from a highly volatile equity fund. However, you are concerned about the potential loss that is subject to market risk. On the other hand, if the market is doing well, you may lose out on a potentially profitable investment. Therefore, initially, you invest a lumpsum amount in a low return, safe fund like a liquid fund. By opting for an STP, you can transfer a fixed amount from your lumpsum investment to an equity fund at regular intervals.

Fund houses sell units from your debt fund and use that money to buy units in the equity mutual fund schemes while accounting for rupee-cost averaging. This way, you minimise the risks associated with volatile markets while earning lucrative returns.

Benefits of STP

Risk Factor

In an STP, you transfer and invest a small chunk of money at a specified period regularly. Your lumpsum amount stays invested in a safe fund, while only smaller amounts get exposed to volatile market conditions.

Returns

The purpose of STP is to earn high returns by playing safe. At any given time, you are investing in multiple asset classes. Your equity funds, although volatile, yield high returns, while the debt portion of your fund continues to earn low but relatively steady returns.

Portfolio Diversification

STPs help you diversify and balance your portfolio by investing in equities to compensate for the low returns from debt funds.

Things to Consider

STP is ideal only if you have access to lumpsum amounts for investing.
While Asset Management Companies state the minimum amount or instalments for STP investment, SEBI mandates that you should invest in at least 6 STPs.
Although you can balance risk, you cannot entirely avoid it. Low market conditions may not generate good returns on equity funds, and the same applies to debt funds.
STP requires you to be consistent and not falter when the market is not favourable.

Conclusion

You can balance your investment portfolio by investing in safe and high-risk funds simultaneously by opting for a Systematic Transfer Plan. Consult your investment advisor and find out the best STPs to grow your wealth and accrue steady returns.

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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.