When it comes to mutual fund investments, you may be aware of Systematic Investment Plans (SIPs) which let you invest systematically every month or week or any other pre-defined periodic manner in a mutual fund scheme. But do you know about STPs?
STP stands for Systematic Transfer Plan. This is also a way to invest in mutual funds just like SIPs but with one major difference. While in SIPs, your bank account is debited at a predefined time with the SIP amount and the amount is invested in a chosen fund. However, in case of STPs, investment is systematically transferred from one fund to another. Let us talk about STPs in details.
How do STPs work?
When you have lump sum money for investment and wish to invest the same in a mutual fund scheme. However, you do not wish to invest the entire amount in one go and would like to space it over a period of time, thus taking the advantage of Rupee Cost Averaging, you can avail the process of Systematic Transfer Plan.
You can start by investing your lump sum in any mutual fund scheme of your choice; and can then place an STP request specifying the amount, the date of transfer and the target mutual fund scheme. On the specified date, the specified amount would be debited from the fund into which you put your lump sum investment. The amount would then be transferred to the target fund which you had chosen.
To illustrate, suppose you have INR 10 lakhs and you wish to invest the same in Equity oriented Fund A. Then to avoid investing the whole amount in equity fund in one go, you can invest this amount in a Liquid Fund B and place a STP request wherein INR 25, 000 would be transferred to Fund A on the 20th day of every month. If you invested the money on 1st January, then INR 25, 000 would be transferred from Fund B to Fund A every 20th of every month, starting from the from 20th of January itself. The STP will continue as long as you have specified, i.e. number of instalments or there is the money in Fund B, whichever is earlier.
Thus, under STPs, Fund B, wherein you invest originally, is called the source fund or transferor fund and Fund A, in which the amount is transferred, is called the target fund or the destination fund.
Objective of choosing STPs
STPs can be chosen by investors in the following instances –
- When they don’t have a regular source of income from which they can create a SIP
- When they get a lump sum money in hand and want to stagger their investments over a specified period to avail the benefit of rupee-cost averaging
- When investors don’t know how to time the market and have a lump sum amount for investment
Features of STPs
Some salient features of STPs include the following –
- There might be a minimum investment criterion on the fund being transferred through STPs. Some funds have this minimum criterion while others don’t.
- The request for STPs need to be mentioned for a specific tenure, say 6 months.
- Entry load is not applicable to any mutual fund now and so even the units transferred in a STP doesn’t have it. However, exit loads might be applicable in the source fund, which is calculated based on type of fund and investment tenure. Hence, choose your source fund wisely.
- Tax implications may arise as STP is essentially considered as redemption from one fund and purchase in another fund. You should, therefore, consider the tax implications of the source fund as well as the target fund.
STPs can be of three types –
- Fixed STPs where a fixed amount is transferred
- Capital appreciation STP wherein the returns generated, over and above the invested amount, would be transferred to the target fund
- Flexi STP wherein the amount to be transferred can be increased or decreased.
Benefits of choosing the STP option
Investing through the STP option is good because of the following reasons –
Benefit of rupee-cost averaging
By choosing STP, your lump sum savings get invested over a regular period when the market is performing differently. You can stagger your investments and get the benefit of rupee-cost averaging. The risks would be reduced and you can enjoy good returns.
In case you are doing STP from debt to equity schemes, and your source fund is a liquid fund, the returns on your lump sum savings could be potentially better than keeping your money idle your savings account with no worry of spending the same!
Freedom from timing the market
When you choose STPs, you don’t have to worry about timing the market as your money would be invested at regular intervals taking advantage of volatile market movements. The transfer would happen on the pre-determined dates and you would be freed from timing the market.
So, the next time you have a lump sum amount at your disposal, choose the STP mode of investing and you can reduce the risk of market volatility and earn good returns.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully