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What is STP is a question that is on the mind of every investor looking for investment options, particularly in the field of Mutual Funds? The full form of STP is a Systematic Transfer Plan.
But before we start understanding what is STP, we must have clarity about SIP (Systematic Investment Plan). First. the SIP is a disciplined way of investing where investors invest a fixed sum at regular intervals in mutual funds. SIP investment is also known for the benefits of Rupee Cost Averaging. And is hailed as the best way to handle volatility in investment. For example, you choose to start investing Rs 1,000 every month in a mutual fund plan. If you invest via SIP mode, this money will be taken from your account every month and saved in the mutual fund investment of your selection.
And then what is STP? STP is just a variant of SIP. STP, as the name suggests, is systematically transferring investment from one asset or asset type into another asset or asset type. The transfer happens at regular intervals, over a period.
The easiest way to understand what is STP is to consider a SIP from your existing investments in a mutual fund to another mutual fund instead of doing it from your bank account.
STP is an automated way of making such transfers. The plan is selected when you want to make a lump sum investment but want to avoid the risk of timing the market.
The most common way of STP is transferring money from a Debt fund to the Best Equity Mutual fund.
An important thing is to know that STP can be done between the mutual funds of the same AMC. Or it can be done between the Mutual Funds introduced by different AMCs.
How STP is beneficial for you
STP is a great choice for those investors who want to make a lump sum investment. But don’t want to invest all at once. This could be because their risk appetite may be low. Maybe they do not want to get tangled in the market volatility. Or they can also be wary of investing in Mutual Funds or Equities as a rule. These investors can opt to invest their money in a Liquid or Debt Fund. When this amount gets transferred to an Equity Mutual Fund, you earn the Returns from the Debt Funds as well as potential returns from the Equity one.
You get SIP benefits
STP investments let you reap the benefit of SIP. With STP, you first invest your lump sum money in the Best Debt Fund (generally) and then transfer a fixed amount from that Debt Fund to an Equity Mutual Fund (an ELSS Fund, generally). Just like you make an investment under SIP.
Rupee Cost Averaging
An STP averages out your purchase price. Thereby, protecting you from investing in a market at a time when it is at a high. For example, suppose the NAV of a type of Mutual Fund is Rs 10 in the first month, Rs 8 in the second month and Rs 6 in the third month, an STP will get you an average price of Rs 8. On the other hand, if you had invested your lump sum in the first month itself, you would have had to purchase at a price of Rs 10.
SWP Benefits
You get the advantages of SWP (Systematic Withdrawal Plan) when you opt for STP. Because with the Systematic Transfer Plan, you can also transfer your funds from Equity to Debt which helps you take out your money in risky market conditions like SWP.
Liquidity
Under STP, you have your lump sum amount under a Debt Fund. Therefore, you can redeem the units from your Debt Fund any time. This is how you get complete liquidity.
Higher Returns
Amount invested under Debt funds also earns Returns to you and works for you. Whereas, the money sitting idle in a savings bank doesn’t earn you much interest.
When are Markets High
Many investors wait for market corrections instead of setting up STPs immediately. Although this approach would yield higher returns, in theory, it may not work actually. This is because it is practically impossible to tell how long a correction will run and how deep it will go. Investing in correction amounts to timing the market and this can be almost impossible to successfully predict.
Therefore there is also no better time than today to invest. This implies, whenever you have a large lump sum amount to invest, consider investing in Debt Funds, first, And set up STP. The exception is when you are taking a call on the market or certain sectors for having high growth in the near future.
E.g. if you are very sure that in 2-3 years the Infrastructure Sector will pick up well. That some government policy is on the horizon. You might want to put in a small lump sum amount. If you are not comfortable taking such calls on the market, the best way for you is to invest the lump sum in Liquid or Debt funds and set STP in the Best Equity Funds.
Types of STP
Fixed STP
In this case, the amount to be transferred periodically is fixed. You can decide on this amount as per your financial goal and apply for the same.
Capital Appreciation
For this kind of STP, only the appreciation amount on the capital is transferred from source funds to the destination fund. Thereby, your lump sum remains invested in the source fund.
Flexi STP
As the name implies, Flexi STP is flexible. This means you can choose to transfer a varied amount from the source fund to the destination fund. So you may choose the amount as per the market rate fluctuations. That means that if the NAV of the destination fund dips, you can increase the amount and vice versa.
How to Invest in STP
Investing in STP is very simple. All you need to do is:
- Get your investment account activated. Complete your KYC and Registration at WealthBucket and upload the necessary documents.
- Select and invest in the Debt Funds of your choice. This is also called Source funds. In this, you will invest your lump sum. Make sure these belong to the same fund house.
- Select the Destinations Funds. That is the Equity Mutual Funds or the Equity funds portfolio in which you want to invest for long-term
Things to Remember
- Choose Systematic Transfer only if you have a lump sum amount to invest which you might not need soon.
- STP investment can be undertaken between the mutual funds of the same fund house (AMC).
- Though the fund house decides the minimum amount to be invested, you need to make at least 6 STPs as per the SEBI guideline.
- Systematic Transfer is performed as redeem in one fund and purchase in another, on the same day.
- Choose the Source Funds that don’t have an Exit Load.
- Choose the Destination Funds according to your investment objectives.
- STP is one of the most reliable strategies that an investor can adopt to reduce risk element. However, they cannot remove the risks completely. You can also expect a decline in returns if the market is low.
- This method needs discipline. You should not opt-out of a plan just because you panicked at a sudden market fluctuation or change in the rates. This will only defeat the purpose of your investing via the Systematic Transfer Plan.
- Always look-out for the underlying assets and their phases. For instance, it would be illogical to transfer capital, when the market is moving to the peak.
- Once you have selected the source and the destination funds, you need to decide how much to transfer and the frequency. The frequencies available, mostly, are weekly, monthly, and quarterly.
Best Debt (Source) Funds for STP
Choosing the Best Debt Fund Portfolio would actually depend on the equity fund portfolio of your choice. Here are a few good short-term debt funds for the STP source portfolio. You can use this portfolio for investing otherwise as well.
Best Debt for STP: WealthBucket
Best Equity Portfolio For Destination Fund
The Equity Portfolio would depend on your investment objectives and the duration you can stay invested. If you have a simple goal of wealth creation in the long-term, select a well-diversified portfolio of good performing multi-cap funds, large-cap funds, and small-mid cap. Here is a good equity portfolio (destination), you can choose for your STP.
Best Equity for STP: WealthBucket
Final Notes
STP is the most dependable way of investing the lump sum in unpredictable markets. Through STP, you invest the lump sum amount in the Debt Funds and fix-up regular transfer to the desired Equity funds. Systematic Transfer Plan helps you reduce the uncertainty of investing in equity funds.
On the last note, the STP is a useful strategy to manage risks without affecting your returns greatly. WealthBucket offers you handpicked funds from the top-performing fund houses. We work with reliable, trustworthy and reputed AMCs of the market. If you want to invest via STP, you can choose one of the plans suiting your requirements.
Our vast services include Debt mutual fund, Large Cap mutual fund or Multi-Cap mutual fund, SIP Calculator and much more.
Call now at +91 9999379929. You can also email us at contact@wealthbucket.in
