Though SIP is made popular to Indian mutual fund investors, STP is still a relatively unknown word. In this article we will deep dive into the questions, What is STP in Mutual Fund ? How To Use It for Max Benefits. This should be an interesting read for anyone who is a mutual fund investor or planning to invest in mutual funds shortly.
What is STP?
The sull form of STP is “Systematic Transfer Plan”. Like in SIP or systematic investment plan your investment gets into the fund or the market in a systematic way, in STP your funds get transferred to another fund ( Generally equity-linked plans) from a central pool ( Generally liquid funds or other debt funds) in a systematic way. Obviously you can set the transfer frequency and transfer amount as per your requirement.
Under this scheme, a significant amount that you have invested in a fund can be transferred systematically into another scheme of your choice. While many fund houses give the option of daily, monthly, quarterly and money transfer option, there are a few that allows you to do the same weekly.
So you have to research well and pick the one that meets your requirements and is convenient. STPs are a smart way to transfer your money in a disciplined way to a fund that probably litlle bot risky and hence you want to average out your buying price.
Since professional fund managers take care of mutual funds, you have to worry less. Moreover, diversity makes sure that your money is safe and has been put to good use.
There are three types of STPs such as Fixed STP, Flexi STP, and capital appreciation.
Should you go for an STP?
Whether you should go for an STP or not, depends on the following two factors, including:
A. An investor’s existing allocation to equities
B. The risk profile of the investor’s portfolio
This type of investment is ideal for investors who want to invest a lump sum but not at a time (saves them from market volatility). In simpler words, an investor might opt for one if he or she has a lump sum amount to invest, which won’t be required in the near future. Also, he or she is little unsure about putting in all the money at the same time in the equities. In this case, we might want to average his buying cost and hence, he should opt for a systematic transfer plan.
You should check the rates from time to time. It is undoubtedly a reliable low-risk strategy that you can apply to your portfolio. Keep a watch on the market so that you are aware of the current news, which can affect the market, etc.
It is a strategy to manage risk without putting too much pressure on your returns. Invest in STP if you are a moderate risk taker and not really sure about the direction of the market. The lumpsum money in debt fund generates safe return whereas the portion that is going into equities through STP will fetch in higher returns. So, you hedge on your risk and return both.
8 Key Benefits of STPs
Let’s take a look at the benefits of the systematic transfer plan. This will help you to understand if this can be beneficial to you.
Chances of higher returns
Firstly, you may generate higher returns if you go for STPs. It is a good option if you get a plan according to your requirements. You would be able to get steady returns if you go for this plan. As you average out your buying prices or NAV, chances are that you will make a significant gain as market inches higher with time.
Probably this is the biggest benefit of STP. It helps you to balance your portfolio with debt and equity options. With limited exposure to equity, your risks go down significantly. this is a great way to move from a risky asset class to a less risky asset class.
If you are reaching your retirement, or you are a risk-averse investor and do not want to put your all money in equity in one go, then you can think about this investment.
Power of Compounding
STP has the power of compounding just like SIP. You can fully handle STPs as you can directly keep a look on the market scenario.
Helps in financial planning
It will help you if you are planning and working on long-term financial goals. It is a good choice when your financial goal deadline is near as it would help in wealth creation.
It can even reduce your portfolio risk along with the other benefits of the STPs. It also averages out the cost of investment in buying fewer units at higher NAV.
The best part is that you can invest a minimum amount in the initial phase. This is not just an STP benefit, all mutual fund investments thresholds have come down significantly and now it is a worthy option even for the lower middle class.
It is disciplined as well as an attractive investment option as it gives you option to have your feet on both and manage risk as per your choice.
You must know that every transfer is considered a new investment and redemption. The redemption is generally taxable. However, the returns would still be higher than those in a bank account.
What are the negatives of STP
The key negative of this type of scheme is, it only helps if you are unsure. If you are not sure about the market direction and if you are also not sure about how much exposure you should take to equities then this is a good option. However, if the market moves at your direction, you may have to repent for investing here, as most of your capital will be in debt fund in the beginning and we will lose out on the market move.
From an avid investor and risk-takers perspective, it actually sub optimizes on return. But as I said, only a risk-taker will feel that way.
Having said that I must conclude by saying that the market is not everyone’s cup of tea and if you do not understand it, it makes a lot of sense to leave it on someone who does. The fund manager. STP comes in handy here, it gives you a second handle to manage your risks.
It is good for the old people, the uninitiated to market, the newcomers who want to take a tase of equity without risking it too much.
Now that you know what is STP in Mutual Fund in a lot better way, we hope that you will be able to make a smart investment choice. If you are new, it always makes sense to do some reading or consult a SEBI registered investment advisor.
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