Systematic Transfer Plan (STP): Meaning, Features and Benefits

When it comes to investing, a systematic approach can make all the difference. Instead of chasing quick returns, it may be wiser to focus on consistent and well-planned strategies. Most people are familiar with a Systematic Investment Plan (SIP), but that is not the only way to invest methodically. There is another useful option called a Systematic Transfer Plan (STP). Let’s explore what it is and how it works.

What is STP in mutual funds?

An STP allows you to move your money from one mutual fund scheme to another in regular instalments within the same Asset Management Company (AMC). It works like an SIP in terms of regularity and frequency but has a key difference.

While an SIP transfers money from your bank account into a mutual fund, an STP transfers money from one mutual fund to another over a period of time.

STPs are usually set from debt mutual funds to equity funds.

How does an STP work?

An STP helps you invest a lump sum without exposing your money to market risk all at once. Let’s say you receive a bonus at work or a monetary gift from an elder in the family on your birthday. Now, you have Rs 1 lakh, which you are keen to invest in an equity fund for potentially better long-term returns. But you are also wary of investing the entire amount at once due to market volatility.

Rather than putting the entire amount into an equity fund at once, which can be risky, you can use an STP. Here’s how it works:

You invest the full Rs 1 lakh in a low-risk fund, typically a debt mutual fund. Then, through an STP, Rs 5,000 is automatically transferred every month from the debt fund to an equity fund. This spreads out your investment over a span of 20 months or 1 year and 8 months. Additionally, it allows you to benefit from rupee cost averaging while your money continues to grow instead of sitting idle in a bank account.

What are the key features of an STP?

Here are some features of STPs:

• Systematic transfers: STPs allow you to transfer your money at regular intervals, such as weekly, monthly, or quarterly, based on your preference. You also get to choose the amount to be transferred.
• Automated process: The transfers happen automatically once the STP is set up. You do not need to initiate or monitor each transaction manually.
• No entry load: Most mutual funds do not charge an entry load for STP transactions, which makes it a cost-effective way to transfer your money from one scheme to another.

What are the benefits of using an STP for investment?

Here are some advantages of using the STP approach:

• Keeps your money active: Instead of letting your lump sum sit idle in a bank account, you can invest it in a debt mutual fund where it continues to grow.
• Allows you to benefit from rupee cost averaging: STPs help spread your investment over regular intervals. This averages out the cost of buying units and reduces the impact of market volatility.
• Diversifies your mutual fund portfolio: Your money is split between different funds during the transfer period. This gives your money exposure to different types of mutual fund schemes at the same time.
• Lowers investment risk: With STPs, you do not have to make a lump-sum investment in equity mutual funds. This reduces the risk of investing all your money at a market high.
• Removes the need to time the market: You do not need to worry about when to enter the market with STPs. Timing the market can be a complicated process which requires expertise and experience. Retail investors may lack this skill. STPs spread out your investments over time, removing the need to find the ideal time to invest a lump sum.
• Offers a simple and automated investment process: STPs run automatically, and you do not need to manually transfer your money. They make investing more convenient and hassle-free.

When should you consider an STP?

Here are some situations when an STP can be helpful:

• When you have a lump sum to invest: Instead of investing a large amount all at once, you can use an STP and go for smaller, regular investments.
• When transitioning from low to high risk: If you are moving funds from a low-risk investment like a debt fund to a higher-risk equity fund, an STP can lower the risk and help you move your money gradually.
• During market uncertainty: If the markets are volatile and you are unsure about timing your investment, an STP can help spread your exposure over time.

Conclusion

STPs can be helpful in a number of ways. If you find yourself in a situation where they make sense, do consider them. However, make sure you understand the STP rules of the AMC before you begin.  

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