What is Systematic
Transfer Plan (STP)?
Equity fund investment has the potential of
wealth creation through capital appreciation, whereas debt fund investment
accounts for consistent returns in the long run. Investor risk appetite plays
an important role while choosing between the two and unpredictable nature of
equity fund returns normally pulls investors away from them. What if some
investor wants best of both worlds i.e. wealth creation and consistency at the
same time? This has been made possible by the fund houses, as they have
introduced the Systematic Transfer Plan (STP) concept.
Through STP, investors
can invest lump sum amount in schemes with stable returns i.e. debt funds and
ascertain small exposure in equity schemes, so as to maximize the chances of
wealth creation in long run. STP operates via investment of a lump sum amount
in a debt scheme (100% debt or with very less equity exposure) and specifying a
predefined sum to be invested in any equity schemes of the same AMC at regular
intervals. The switching can be in reverse fashion also, depending upon the
market scenario. This is in a way similar to SIP(Systematic Investment Plan), resulting in
lower risk and higher return.
What is STP?
Systematic Transfer
Plan (STP) enables investors to periodically switch mutual fund investments
from one scheme to another. First scheme from which money is transferred is
called the ‘Source’ scheme and the scheme to which money is transferred is the
‘Target’ scheme. Both source and target schemes should be of the same Asset
Management Company. On the date specified by the investor, the amount chosen is
transferred from source scheme to target scheme of investor’s choice. This
automatic switching repeats itself at pre specified frequencies till the tenure
ends.
Benefits of STP
Concepts of SIP and
SWP (Systematic Withdrawal Plan) were introduced basically to minimize the risk
of timing the market and maximize the return at the same time. Systematic
transfer plan functionally is a combination of SIP and SWP, which has following
benefits:
·
Optimum balance of risk and return - STP ensures consistent return with
capital appreciation potential, which is not possible if investment in either
debt or equity scheme is done. Individually, debt funds lack capital
appreciation potential while equity funds returns are unpredictable in nature.
·
Investment Cost Averaging - As mentioned earlier, STP is
equivalent to SIP + SWP, hence you keep on buying more number of less costly
units and less number of more costly units. This ultimately lowers your cost
resulting in enhanced returns.
·
Portfolio Re balancing – Investing through STP automatically rebalances portfolio
between debt and equity. If your portfolio is debt heavy, STP keeps on
allocating more money towards equity funds and vice versa.
Best Time to Invest
through STP
There are basically
two modes by which you invest in STP.
First case - Source
fund is a debt fund and target fund is an equity fund. In this case, investment
through STP is recommended when equity market is trading around its peak and
future uptrend doesn't seem likely. In this way, you get to buy equity fund at
cheaper valuation in future.
Second case - Source
fund is an equity fund and the target fund is a debt fund. In this case,
investment through STP is recommended when equity market is trading around its
bottom and future downtrend doesn't seem likely. In this way you keep on
booking profit in equity fund as the market goes up and at the same time your
money gets invested in a debt fund with more consistent returns in future.
