What Is An Systematic Transfer Plan?
An STP(Systematic Transfer Plan) is a plan that allows you to give consent to a mutual fund to periodically transfer a certain amount / switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house. Thus at regular intervals an amount/number of units you choose is transferred from one mutual fund scheme to another of your choice.
By using STP (Systematic Transfer Plan) you can invest your money as lump sum amount in debt funds (liquid/ultra-short funds), and transfer a predefined amount into another scheme, typically an equity fund. The scheme in which the lump sum investment is made is called ‘source scheme’ or ‘transferor scheme’ and the scheme to which the amount is transferred is called ‘destination scheme’ or ‘target scheme’ or ‘transferee scheme’. Generally investors put lump sums into a liquid/ ultra short-term fund and transfer it to an equity/ balanced/sectoral /thematic fund.
WHAT IS THE ADVANTAGE OF AN STP?
1. Consistent Returns.
Through STP, you can transfer your money to a target equity fund while you are invested in a debt or liquid fund. So, you will get the returns of the equity fund you are transferring into and at the same time you will get risk free returns from your debt funds which is generally higher than that of a savings bank account.
2. Rupee Cost Averaging.
Hence, a fixed amount of money is invested in the target fund at regular intervals, STP assists in averaging out the cost of investors by purchasing more units at a lower NAV and vice versa same like an SIP.
3. Rebalancing Portfolio.
STP facilitates in rebalancing the portfolio by allotting investments from debt to equity or vice versa. Many investors use this method to rebalance their portfolios. If investment in debt increases, money can be reallocated to equity funds through systematic transfer plans. If investment in equity goes up, money can be switched from equity to debt funds, using STP.
How Does Systematic Transfer Plan Works?
You have to select a fund from which the transfer should take place and a fund to which the transfer is taking place. Transfers can be made daily, weekly, monthly or quarterly(like an SIP) depending upon the STP chosen and the options available with your AMC.
If you choose to transfer from a liquid fund to an equity fund, then your lump sum is invested in a liquid or a floating short-term plan and is transferred at regular intervals(as your pre defined) to a specified equity fund. For example, if you have 100,000 to invest in equities; you can put the entire amount in a liquid plan and go for a monthly SIP of 10,000 in an equity plan through an STP.
STPs can carry Exit Loads as per the respective mutual fund of the AMC.
If you invest offline using forms of fund houses, you will have to transfer from the debt fund to the equity fund of the same fund house. However, if you use an online portal, many offer the flexibility to transfer from a debt scheme of one fund house to an equity scheme of another fund house.
Types of Systematic Transfer Plan.
A Systematic Transfer Plan is of three types; Fixed STP, Capital Appreciation STP and Flexi STP.
1. Fixed STP
In Fixed STP, you take out a fixed sum of money from one investment to another.
2. Capital Appreciation STP.
In Capital Appreciation STP, you take the profit part out of one investment and invests in the other.
3. Flexi STP.
In Flexi STP, you have a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.
Thus, STP is particularly suitable to investors who have lump sum money and wish to invest in equity funds but are wary of timing the market. They can then choose to invest the money in a liquid or debt fund as lump -sum and use the STP option to systematically transfer at fixed amount of money at regular intervals into the target equity fund.