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Yogi Zone

Useful articles for your finance management by our team of experts

What is Systematic Transfer Plan (STP)?

stp in mutual funds

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 Rebalancing – 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.

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