Understanding STP in Mutual Funds 

If you want to make wise investment decisions in equity mutual funds, it’s important to understand STP, i.e. Systematic Transfer Plan guide is an excellent resource that provides all the necessary information about STP.

What is STP in Mutual funds? 

A systematic Transfer Plan (STP) is a strategy that allows investors to transfer money from one mutual fund scheme (usually a debt scheme) to the other mutual fund scheme (usually an equity scheme) on a periodic basis. Smart Investors use the STP option to beat the short-term market volatility, which works in the following way.

Suppose Richa wants to invest Rs. 10 lacs in an Equity Mutual Fund for the long term. But she is not sure about the short-term direction of the equity market. So she deploys the money in a Liquid Fund, which is a debt-based low-risk fund for the purpose of parking the money in the short term. She then avails the weekly STP of Rs. 1 lacs from Liquid Fund to Equity Fund for 10 weeks.

The STP Option allows Richa to systematically move Rs. 1 lacs every week over the next 10 weeks from a Debt Fund (low risk) to an Equity Fund (high risk). This option allows multiple entry points in the equity fund and averages out the purchase cost (i.e. NAV) in the short term. This, in turn, helps Richa to beat short-term market volatility in the equity market.

There is a residual amount (gains in the liquid fund) that is left in the liquid fund after 10 weeks. Hence, Richa can set 1 extra STP so that the residual amount also moves to the equity fund in the 11th week.

Hence, the primary goal of STP is to reduce the risk associated with short-term market fluctuations. STP option can be availed from one scheme to the other scheme within the same mutual fund house only.

Differences Between SIP & STP

SIP and STP are the two modes of systematic investments in Mutual Funds. Both involve investing, but they serve distinct objectives.

Systematic Investment Plan (SIP)

SIP involves investing a predetermined amount of money at set intervals directly from the customer’s bank account to the mutual fund scheme.

SIP is typically used to save and invest a part of your regular monthly income in a systematic manner. By nature, SIP allows investors to benefit from rupee cost averaging in a volatile market nature.

Systematic Transfer Plan (STP)

STP involves transferring funds from one mutual fund scheme (usually debt fund) to a different mutual fund scheme (usually equity fund) of the same fund house.

STP is typically used to invest the lumpsum money in equity markets in a staggered mode over a set time period. This allows the investors to beat the short-term volatile nature of the market.

Points to be Noted Before Investing in STP

• Keep in mind the risks and fluctuations in the market. STP includes the transfer of assets across schemes; therefore, market knowledge is required. 
• Minimum Transfers: ensure that you adhere to the minimal transfer standards established by the SEBI regulations and the asset management company (AMC).
• Tax Implications: When reclaiming assets, be mindful of any potential tax implications, specifically capital gains tax.
• Exit Load: If you quit the plan before a certain period, some funds may charge an exit fee. Be mindful of these fees.
• Consistency: When implementing transfers, be consistent. Don’t interrupt the plan prematurely, as it may affect its effectiveness.
• Policies of the AMC: Be sure to update yourself on the particular policies of the AMC providing the STP since they could differ from one another.
• Financial Objectives: Check that your investment in STP is in line with your financial objectives and tolerance for risk.

Investors should deliberate on these elements and, if required, seek advice from a financial expert before starting an STP investment.

Conclusion

Here is the summary in bullet points on STP investments:

• STP, or Systematic Transfer Plan, is an effective approach to beat short-term market volatility for investing in Equity Mutual Funds.
• STP permits controlled transfers within the same asset management company between various mutual fund schemes.
• The investment horizon, market knowledge, tax consequences, and portfolio strategy are important things to think about. Choosing carefully might lead to the benefits that STP offers. Consult experts at My Money Panda to choose the right investment and STP Plan for you.

Frequently Asked Questions 

1. Is STP better than SIP?

It’s important to understand that STP and SIP have different roles.

SIP is used to invest your monthly savings on a regular basis in a systematic manner directly. STP is used to invest lump-sum money in a staggered mode to beat out short-term market volatility.

2. Who should invest in STP?

Consider using a Systematic Transfer Plan (STP) if the investor has a large sum to invest but wants to avoid market fluctuations. It can help reduce portfolio volatility and lower your risk.