How mutual fund systematic transfer plans or STP work
An investor transfers a fixed amount of money from a fund category to another.
A fixed amount is taken out in the former STP from one investment to another.
Most investors know what is SIP of the mutual fund, but many of them, especially new investors, do not understand the term STP or systematic transfer plan. It is also significant in mutual fund investment and investors can use it as a defense system in a volatile market. In fact, a Systematic Transfer Plan is a variant of a systematic investment plan. STP is beneficial to transfer investment from one asset to another asset. Read this article to know more about STP and how does it work.
What is STP and its significance in mutual fund
A Systematic Transfer Plan or STP is an important term in the mutual fund. In this method of investing, an investor transfers a fixed amount of money from a fund category to another, but in a fixed interval. For example, a fixed amount from a debt fund into equity fund every month. It is a fantastic way of structuring your large sum of money more beneficially. Systematic Transfer Plan offers the benefit of SIP and also makes the best of the volatility in the market. Besides, it helps you to make the best use of your idle money.
How STP works
STP is a structured way to transfer money from one asset type to another asset type. By using this mechanism, the balance in the first fund reduces, and the second fund increases due to the fund transfer. If you opt for the STP, the money will get transferred automatically, and there is no need for an investor to transfer the money. Two types of STP available in mutual funds like the fixed STP and the capital appreciation STP. A fixed amount is taken out in the former STP from one investment to another, whereas, investors take the profit part only in the latter case, and invest in another fund.
Significance of STP
In a mutual fund, the best investment strategy is a SIP. However, you can consider STP as the second-best strategy which is effective for risk mitigation. By choosing the STP, you can protect your fund from adverse loss to some extent. But, it can reduce returns in a bullish market. If you choose STP, you need to do it with discipline and can enjoy benefits only if it follows properly. If you break STP due to any interest rate or short-term market movement, it may affect your investment badly in the long term.
Benefits of STP
You can enjoy some clear benefits by investing your money in mutual funds through STP. The following are the advantages of choosing STP.
Lump sum investment: An investor can invest a lump sum amount in mutual funds through STP. For example, if you get a sum of Rs.30 lakhs through the sale of a property, you can invest that amount in a couple of liquids funds first. People mainly choose liquid funds to invest a lump sum amount as these funds offer relatively low-risk. Then, you can start STPs from these funds into equity funds for the next few years. This is less risky and more beneficial than investing the entire money on a single day or invests over 3-4 days.
Rupee cost averaging: STPs provide the benefit of rupee cost averaging. It minimizes your cost of holding mutual fund schemes over a period of time. The price for buying equity mutual funds is averaged in STP over many months. It helps to buy more units for the same amount of money in a falling market.
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