Systematic Transfer Plan (STP) is a strategy where an investor transfers a fixed amount of money from one category of fund to another, usually from debt funds to equity funds. Investing a lump sum amount in stocks or equity mutual fund could be dicey for the investor as equity markets are volatile and returns in equity mutual fund is linked to the performance of stock market. Systematic Transfer Plan helps to keep a balance of risk and return.
1. Consistent return – Money invested in debt fund earns interest till the time it is transferred to equity fund. The returns in debt fund are higher than returns from savings bank account and assure relatively better performance
2. Averaging of cost – STP has some integral features of systematic investment plan (SIP). Similar to SIP every month an amount is invested in an equity fund. One of the differences between STP and SIP is the source of investment. In case of the STP, money is being transferred from a debt fund and in case of SIP, from investor’s bank account. Since it is similar to SIP, STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price
3. Rebalancing portfolio – An investor’s portfolio should be balanced between equity and debt. STP helps in rebalancing the portfolio by reallocating investments from debt to equity or vice versa. If investment in debt increases money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund
Say if a person wants to invest 2,40,000 amount in an equity fund through STP, he will have to first select a debt fund which allows STP to invest in that particular equity fund. After selecting the debt fund invest all the money that is 2,40,000 in the debt fund. Now you have to decide an amount which will be transferred from debt fund to equity fund and the frequency (i.e he may choose 5000 amount to be transferred in 36 installments on a monthly basis).
Every month on the fixed date amount 5000 will be transferred from the debt fund to the desired equity fund.
Fixed STP – In this type of Systematic Transfer Plan the transferable amount will be fixed and predetermined by the investor at the time of investment
Capital Appreciation – The capital appreciated gets transferred to the target fund and the capital part remains safe
Flexi STP – Under Flexi STP investor have a choice to transfer variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market. If the NAV of the target fund falls investment can be increased to take benefit of falling prices and if the market moves up the minimum amount of transfer is invested to take advantage of increasing prices. Transfer facility is available on a daily, weekly monthly and quarterly interval
Using SIP Calculator-STP Calculator, To prepare a plan and illustration of your STP investment.
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