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 debt funds to equity funds. Investing a lump sum amount in equity or mutual fund could be dicey for the investor as Equity markets are volatile and returns in equity mutual fund is linked to the performance of stock market. On the other hand if the investor invests the lump sum amount in debt funds it will generate less return when compared to other investment avenues. Systematic transfer plan helps to keep a balance of risk and return.
Benefits of STP
Consistent return – Returns in SPT are pretty consistent as money invested in debt fund earns interest till the time it is transferred to equity fund. The returns in debt fund are higher than returns from savings bank account and assure relatively better performance.
Averaging of cost – STP has some integral features of systematic transfer plan (SIP). Similar to SIP every month an amount is invested in an equity fund. One of the differences between SPT and SIP is the source of investment. In case of the former money is being transferred from a debt fund and in case of later investor’s bank account. Since it is similar to SIP, STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price.
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. If investment in debt increases money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund.
How does STP work?
Say if a person wants to invest Rs 10 Lakhs in an equity fund through STP, he will have to first select a debt fund which allows STP to invest in that particular equity fund. Generally both the funds are managed by the same fund house. After selecting the debt fund invest all the money that is Rs 10 Lakhs in the debt fund. Now you have to decide an amount which will be transferred from debt fund to equity fund.
Entry and Exit Load
A minimum of six transfers is required to apply for a STP. There is no entry load while entering into the fund. Exit load varies from fund to fund depending upon the period of investment subject to a maximum of 2%.
The minimum investment required again varies for different fund houses, however for some fund houses minimum investment required in a systematic transfer plan is Rs.12000/- with a minimum of six installments of more than transfer of Rs 1000 or more.
Types of STP:
Fixed STP – In this type of Systematic Transfer Plan the transferable amount will be fixed and predetermined by the investor at the time of investment.
Capital Appreciation – The capital appreciated gets transferred to the target fund and the capital part remains safe.
Flexi STP – Under Flexi STP unit investor have a choice to transfer variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market. If the NAV of the target fund falls investment can be increased to take benefit of falling prices and if the market moves up the minimum amount of transfer is invested to take advantage of increasing prices. Transfer facility is available on a daily, weekly monthly and quarterly interval.
Key points to remember
Systematic transfer plan is a transfer from one fund to another fund in a systematic manner. The amount of money transferred is fixed except under flexi STP.
By and large a minimum of 6 such transfers are required to invest in STP
There is a minimum amount to be invested in a systematic transfer plan which depends upon different fund houses
Usually money is transferred from debt fund to equity fund. There are very few companies in India which gives an option of transferring money from equity to debt fund
Transfer can be weekly, fortnightly, monthly and Quarterly
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