What is Systematic Transfer Plan?
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 a debt fund to an equity fund. Investing a lump sum amount in stocks or equity mutual fund could be dicey for some investor considering the volatility of equity markets and returns in equity mutual fund is linked to the performance of stock markets. STP helps to keep a balance of risk and return. Further, it helps investor invest in equity at appropriate time and till then, investor enjoys debt returns.
Benefits of STP
a) Consistent Return
Money invested in debt fund earns interest till the time it is transferred to equity fund. The returns in debt funds are usually higher than returns from savings bank account and assure relatively better performance.
b) Averaging of Cost
STP has some integral features of Systematic Investment Plan (SIP). One of the differences between STP and SIP is the source of investment. In case of the former, money is transferred usually from a debt fund and in case of latter; it is the investor's bank account. Since it is similar to SIP, STP also helps in rupee cost averaging.
c) 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.
How does STP work?
Say if a person wants to invest ` 12 Lakhs in equities through STP, he will have to first select a source scheme (debt scheme) and a target scheme (equity scheme). ` 12 Lakhs will be first invested in the source debt fund. The investor will also decide the amount and the frequency according to which the funds will be transferred from source debt fund to the target equity fund (i.e. he may choose 1 lakh to be transferred in 12 installments on a monthly basis). In this scenario, every month on the fixed date 1 lakh will be transferred from the debt fund to the desired equity fund.
Watch out this space for more, next we will cover “Systematic Withdrawal Plan (SWP)” in our next article
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.