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Guide to Mutual Funds
Systematic Transfer Plans (STP)
Another method of investing in mutual funds at regular intervals is Systematic Transfer Plans or STP.
Let us take a look at what it is?
A systematic transfer plan is a process of transferring a fixed number of units or a certain amount from one scheme of a mutual fund to another at a fixed interval. Both the mutual funds have to be of the same fund house to enjoy this facility.
Eventually, the number of units in one fund will decrease while the number of units in the other fund will increase. During an STP, units of the fund (to which the STP is done) is purchased at the NAV of the date on which the transfer is made.
So, in reality, it works almost like a SIP, with the difference being that instead of the fund being debited from your bank account, it remains invested in another mutual fund scheme. The basic idea is that instead of keeping the fund in your savings account and earning less interest, you keep it in a fund that will give you slightly better returns.
Generally, the lump sum is kept in a debt market fund so that the risk incurred on the fund is low. However, there is no hard and fast rule regarding this. You may choose to do an STP from an equity fund to a debt fund too to keep the profit earned on your equity fund safe.
STP forms are available with fund houses. You can fill-up the form and mention the name of the two funds between which you want to implement the STP. You can also mention the date on which you want to transfer the fund and specify the amount or unit you want to transfer. STP can be done quarterly, monthly, weekly, daily, etc.
Benefits of STP
STPs have a range of benefits:
1. Ability to Earn More on Your Savings
If you already have a lump sum amount, but instead of investing everything at once, you want to invest regularly and benefit from varying market levels, STP is a great option for you. Instead of keeping the fund idle in your savings account and earning very little interest, you can invest in a mutual fund scheme that has a lower risk profile but gives higher returns than a savings account and benefits in the long run. After all, investment is all about being smart, isn’t it?
2. Rupee Cost Averaging
An STP is similar to a SIP, only that instead of being debited from your savings account, the installment amount comes from another mutual fund scheme. Hence, like SIPs, STPs also benefit from rupee cost averaging since the funds in the new scheme are purchased over a certain period.
3. Rebalancing of Portfolio
STPs are great methods to rebalance a portfolio. For example, if you think that the allocation to debt funds is higher in your portfolio and you want to benefit from the volatility of equity markets, you can opt for an STP. The opposite is true as well. You can do an STP from equity to debt fund to rebalance your portfolio.
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