What is a Systematic Transfer Plan (STP) in mutual funds? Benefits of using it along with SIP?

What is a Systematic Transfer Plan (STP) in mutual funds? Benefits of using it along with SIP? | Vrid
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Most of us either know about the Systematic Investment Plan (SIP) or heard about it. But we rarely hear about similar strategies like Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP).

These plans can complement well with your SIP strategy and help you navigate your financial journey with ease.

So, in this post, let’s understand what a Systematic Transfer Plan (STP) is and how to use STP along with SIP to maximize your returns and reduce your risk.

Estimated read time: 4 minutes and 24 seconds

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What is a Systematic Transfer Plan (STP)?

A Systematic Transfer Plan (STP) is an investment strategy that allows you to transfer a fixed amount of money systematically from one mutual fund scheme to another.

With STP, you can move funds from a debt fund or liquid fund to an equity fund or any other fund of your choice. Or you can move funds from an equity fund to a debt fund as well. 

How does STP work?

Let’s break down the workings of an STP in simple terms.

Suppose you have a lump sum amount you want to invest in equity. Investing the lump sum amount in an equity fund in one go is risky. So you add these funds to your savings account and use SIP to invest in an equity fund over a few months.  

This is a good plan, but it is not very efficient. Because you receive a low interest on the remaining amount in your savings account. 

There is a better way to maximize your returns.

You can invest the lump sum amount in a liquid debt fund. After that, you can utilize STP to move funds from this debt fund to your selected equity fund spread across a few months. 

Also, STP can be useful in your goal-based investment planning as well. 

When you are saving for an important goal like your child’s education, buying a home or retirement, and you are nearing your goal, don’t wait till the target date. You can use STP to move your money from equity to debt well before the time you need the money.

Remember, SEBI mandates no minimum investment amount to invest through STP in Mutual Funds. However, most asset management companies require a minimum investment amount and a minimum of 6 transactions to be eligible for STP.  

Here’s how STP works:

1. Choose the source fund and target fund 

Select the fund from which you want to transfer your money (source fund) and where you want to invest (target fund).

2. Determine the transfer frequency and amount 

Decide the frequency (monthly, quarterly, etc.) and the amount you wish to transfer from the source fund to the target fund.

3. Initiate the STP 

Fill in the forms and instructions with your mutual fund provider or investment platform to set up the STP. The transfers will be automatically executed as per your specified frequency and amount.

Benefits of Systematic Transfer Plan (STP)

1. Risk mitigation

STPs provide a mechanism to gradually shift investments from low-risk funds (debt or liquid) to potentially high-yielding funds (equity or others). This gradual transition helps mitigate the impact of market volatility and allows for a smoother investment journey.

2. Portfolio rebalancing

STPs enable you to rebalance your portfolio by moving funds between different asset classes or funds. This allows you to maintain an optimal asset allocation per your risk profile and investment goals.

3. Rupee cost averaging

Similar to SIPs, STPs leverage the power of rupee cost averaging. By investing a fixed amount at regular intervals, you buy more units when prices are low and fewer units when prices are high. Over time, this strategy might lead to better average purchase prices and returns.

4. Convenience and flexibility

STPs offer convenience by automating the transfer process. Once you set up the STP, the transfers occur automatically according to your chosen frequency. You can change or stop the STP per your investment needs or market conditions.

Limitations of Systematic Transfer Plan (STP)

1. Market timing risk

While STPs aim to mitigate market volatility, it’s important to note that they do not eliminate the risk of poor market timing. Transferring funds from a low-risk fund (debt or liquid) to a higher-risk fund (equity or others) exposes your investments to market fluctuations. If the equity market is at a high point during the transfer, it may negatively impact your returns in the short term.

2. Fund selection risk

The success of an STP also depends on the source and target fund selection. If the chosen funds underperform or do not align with your investment goals, you may not achieve the desired outcomes. Thorough research and understanding of the fund performance, investment strategy, and track record are crucial.

3. Cost considerations

STPs may involve additional costs, such as exit loads or transaction charges. This depends on the mutual fund house policies. These costs can reduce your overall returns and impact the effectiveness of the STP strategy. It’s crucial to evaluate and compare the associated cost before implementing an STP.

How to use STP along with SIP?

You can effectively combine STPs with SIPs to optimize your investment strategy. Here’s how:

1. Initial investment

If you have a lump sum amount and are unsure about investing it all in one go, you can start with an STP by parking the amount in a low-risk fund and systematically transferring it to an equity fund through STP. This approach allows you to take advantage of rupee cost averaging and reduces the impact of market timing.

2. Risk mitigation

If you have been investing through SIPs in an equity fund but want to reduce your exposure to market volatility, you can start an STP from the equity fund to a debt fund. This gradual shift helps protect your investments from sudden market downturns while maintaining the potential for growth over the long term.

STP is a valuable tool that can enhance your investment strategy and provide financial stability. 

By understanding how this plan work and including them in your investment planning alongside SIPs, you can align your investments with your goals and aspirations.

As with any investment decision, assess your risk appetite, investment horizon, and financial objectives before implementing STPs. Seeking guidance from financial advisors or professionals is always advisable to make informed decisions.

Remember to share these insights with your buddies.

Still Curious?

If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.

Cleartax – Systematic Transfer Plan: Meaning, Process and More

Yadnya Investment Academy – What is STP? Understanding Systematic Transfer Plan

Mintgenie – What is a Systematic Transfer Plan and how it is different from an SIP?

Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.

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DISCLAIMER: This newsletter is strictly educational and is not an investment advice or a proposal to buy or sell any assets. Please be careful and do your own research.

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