STP - The Next Step for Your Liquid Investments

STP or Systematic Transfer Plan is very similar to a convenient form of investing i.e. SIP or Systematic Investment Plan. Before getting to understanding STP, let’s throw a little light on SIP. Systematic Investment Plan works on the principle of rupee cost averaging & it seems to be the most practical way of investing in the market, in spite of the markets uncertain behavior. This is because, not only are you saving regularly, but there is an earning potential.

Systematic Investment Plan has a lot of appeal to the common man, due to its ease of functioning. For example, you decide to invest Rs. 1,000 on a monthly basis in a Mutual Fund. Through Systematic Investment Plan, this amount will get debited from your bank account & will get invested with Mutual Fund scheme for relevant period selected by you. While it is simply not possible to time the market accurately, SIP works for you either ways. Even if the market is going strong or plunging low, both your risks and returns are balanced out. A low market scenario means that you can actually buy units of the mutual fund at very low price. This will help you purchase more units at low prices, and reap the benefits. Similarly in the rising market while you may purchase less units, the potential still remains. However, a strict discipline needs to be adhered to, if the future financial goals are to be realized.

STP on the other hand is a plan that allows the investor to give a mandate to the fund to periodically and systematically transfer a certain amount from one scheme to another of the same fund house. The STP route is an extension of the SIP way of investing. While SIPs allow you to invest small amounts of money in a mutual fund at regular intervals, STPs enable you to transfer money already invested in a mutual fund scheme into another scheme of your choice. STP is wherein you are systematically transferring your money from one scheme to the other.

For an STP you can invest a lump sum amount in one scheme and regularly transfer a pre-defined amount into another scheme. Commonly, investors park a lump sum amount in a debt fund, from where a regular amount is transferred at periodic intervals into the specific equity-oriented funds. It is similar to the drip investing concept of an SIP, the only difference being that money flows from one fund to another in case of an STP instead of being transferred from your bank account. This eliminates the risks associated with timing the market in case of lump sum investments and in turn offers the benefit of rupee cost averaging. You can get into a daily, weekly, monthly or a quarterly transfer plan, as per your needs.

Systematic Transfer Plan & its features

At Quantum, you can invest through this facility in a Fixed STP variant in select schemes, where you can pull out a fixed amount & invest it into another scheme. The mutual fund will reduce the number of units equal to the amount you have specified from the scheme you intend to transfer money. At the same time, the amount transferred will be utilised to buy the units of the scheme you intend to transfer money into, at the applicable NAV.

This is how, the STP will continue to work – redeeming the units of first fund and transferring it into second fund of your choice.

Functionality of a Systematic Transfer Plan

For an STP function you have to choose a fund from which the transfer is taking place (Transferor scheme or fund) and a fund to which the transfer is taking place (Transferee Scheme or Fund). Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen by you and the options available.

The STP takes place in the form of units of the fund. This switch to the new scheme is carried out at the prevailing net asset value (NAV). Depending upon the NAV of the transferor fund, the redeemed units are converted in to redemption amount which is used to purchase the units of the transferee fund.

Say if a person wants to invest in a fund ‘B’ through STP, he will have to first select a fund ‘A’ which allows STP. After selecting the fund ‘A’, he will select fund ‘B’ where the amount will be transferred. But instead of reallocating the entire amount, in STP you can select and set your amount and time period according to your risk appetite and the money will be regularly transferred from fund ‘A’ to fund ‘B’ .

The STP helps against any foreseen or sudden downfalls of the market.

Advantages of a Systematic Transfer Plan

When you feel that your portfolio needs rebalancing, STP comes in handy and saves you from lots of operational hassles that would otherwise go in transferring funds into equity schemes.

When market conditions are in favour of equity growth in near future, it’s good to skew your portfolio towards equity for better returns with the help of STP.

When important goals are approaching near, it is important to protect your capital transfer from equity to debt funds.

Point to be Noted

This helps in deploying funds at regular intervals in equities with minimum timing risk.

Discipline is a very important aspect of the STP. On one hand, be as honest as possible with your monthly investments, but on the other hand, be rigid enough as to not to withdraw any amount, due to sudden market movements. Doing so, will only hamper your investment goals in the future.

STP is a facility for convenience, when the transfer happens from one fund to another it’s still considered as selling of mutual funds and then buying another one, so tax rules applies in the same way.

While these tips may enlighten you on how to invest your money through STP and why, one must always keep a track of investments on a regular basis depending on one’s risks and needs.