What is STP?

A Systematic Transfer Plan (STP) is a mechanism that allows you to automatically transfer a fixed amount of units from one mutual fund scheme (source scheme) to another mutual fund scheme (target scheme) at pre-defined intervals. It essentially acts like a bridge, gradually shifting your investment from one fund to another based on your risk tolerance and investment goals.

How does an STP work?

Imagine you have a lump sum amount you want to invest in the equity market for long-term wealth creation. However, you’re apprehensive about the inherent volatility of equities. An STP can be your ideal solution. Here’s how it works:

1. Choose your source and target schemes: You’ll start by selecting a source scheme, ideally a low-risk debt fund or balanced fund. This scheme will act as your parking place, providing steady returns while your risk appetite adjusts. For the target scheme, choose an equity fund aligned with your long-term goals.
2. Set your transfer frequency and amount: Decide how often you want the transfer to occur (monthly, quarterly, etc.) and the fixed amount you want to move. This could be a percentage of your initial investment or a specific rupee value.
3. Sit back and relax: The STP will automatically execute the transfers at your chosen intervals, gradually shifting your investment from the source scheme to the target scheme.

Benefits of using an STP:

• Rupee-cost averaging: By investing systematically, you purchase units at different NAVs, averaging out the cost per unit over time. This mitigates the impact of market volatility and helps you buy more units when the price is low and fewer units when the price is high.
• Reduced risk exposure: Starting with a low-risk source scheme allows you to build your risk tolerance gradually. As your comfort level with equities increases, the STP automatically increases your allocation to the target equity scheme.
• Portfolio rebalancing: STPs help maintain your desired asset allocation over time. As the target scheme’s value grows relative to the source scheme, the STP automatically adjusts the transfers, ensuring your portfolio stays balanced.
• Discipline and convenience: STPs automate your investment process, eliminating the need for manual intervention and impulsive decisions based on market fluctuations.

Who should consider using an STP?

STPs are ideal for investors with the following characteristics:

• Long-term investment horizon: STPs are best suited for long-term goals like retirement planning or wealth creation, as they require time to reap the benefits of rupee-cost averaging and portfolio rebalancing.
• Moderate risk appetite: Investors who are comfortable with some level of risk but want to ease into equity exposure can benefit from STPs.
• Lump sum investment: STPs are particularly effective for deploying lump sum amounts into the market gradually, mitigating the risk of investing at a market peak.

Things to keep in mind:

• Exit loads: Some source schemes may levy exit loads if you redeem units within a specific period. Factor this into your calculations when choosing an STP.
• Tax implications: Capital gains are applicable when units are redeemed from the source scheme. Consult a financial advisor for tax implications specific to your situation.
• Review and adjust: Regularly monitor your STP performance and adjust the transfer frequency or amount as needed based on your evolving risk appetite and market conditions.

STP vs. SIP:

STPs and Systematic Investment Plans (SIPs) are often confused, but they serve different purposes. SIPs involve investing a fixed amount at regular intervals directly into a target fund, while STPs transfer units from one existing scheme to another. Choose an STP if you already have a lump sum investment and want to gradually shift it towards equities, while SIPs are ideal for starting fresh investments with a regular cadence.