Investing in mutual funds is a great way to grow your wealth over time. However, with so many options available, it can be overwhelming to choose the right investment strategy. One such strategy that has gained popularity in recent years is the Systematic Transfer Plan (STP). In this article, we will provide a comprehensive guide to STP for beginner to intermediate investors in India.
What is a Systematic Transfer Plan?
A Systematic Transfer Plan (STP) is an investment strategy that allows investors to transfer a fixed amount of money from one mutual fund scheme to another on a regular basis. The transfer can be made on a daily, weekly, or monthly basis, depending on the investor's preference. The purpose of STP is to help investors manage their risk and optimize their returns.
STP is particularly useful for investors who have a lump sum amount to invest but are unsure about the timing of the market. By investing the lump sum amount in a debt fund and transferring a fixed amount to an equity fund on a regular basis, investors can benefit from the potential upside of the equity market while minimizing their risk.
How does a Systematic Transfer Plan work?
Let's say you have a lump sum amount of Rs. 1 lakh that you want to invest in mutual funds. You are interested in investing in an equity fund but are unsure about the timing of the market. You decide to invest the entire amount in a debt fund and set up an STP to transfer Rs. 10,000 every month to an equity fund.
Here's how the STP will work:
- Month 1: Rs. 10,000 will be transferred from the debt fund to the equity fund.
- Month 2: Another Rs. 10,000 will be transferred from the debt fund to the equity fund.
- Month 3: Another Rs. 10,000 will be transferred from the debt fund to the equity fund.
- And so on...
By the end of 10 months, your entire lump sum amount will be invested in the equity fund. This way, you can benefit from the potential upside of the equity market while minimizing your risk.
Types of Systematic Transfer Plans
There are two types of Systematic Transfer Plans:
- Fixed STP
- Capital Appreciation STP
Fixed STP
In a Fixed STP, a fixed amount is transferred from one mutual fund scheme to another on a regular basis. This type of STP is suitable for investors who want to transfer a fixed amount of money from a debt fund to an equity fund on a regular basis.
Capital Appreciation STP
In a Capital Appreciation STP, the transfer amount is not fixed. Instead, the transfer amount is based on the capital appreciation of the mutual fund scheme. This type of STP is suitable for investors who want to transfer the gains from a debt fund to an equity fund.
Benefits of Systematic Transfer Plan
Here are some benefits of Systematic Transfer Plan:
- Minimizes risk: By investing in a debt fund and transferring a fixed amount to an equity fund on a regular basis, investors can minimize their risk.
- Optimizes returns: By investing in an equity fund, investors can benefit from the potential upside of the equity market.
- Disciplined approach: STP helps investors maintain a disciplined approach to investing.
- Flexibility: Investors can choose the frequency of transfer and the amount to be transferred.
Things to consider before investing in Systematic Transfer Plan
Before investing in Systematic Transfer Plan, here are some things to consider:
- Investment objective: Investors should have a clear investment objective in mind before investing in STP.
- Risk appetite: Investors should assess their risk appetite before investing in STP.
- Market conditions: Investors should consider the prevailing market conditions before investing in STP.
- Fund performance: Investors should evaluate the performance of the mutual fund schemes before investing in STP.
Examples of Systematic Transfer Plan
Let's take a look at some examples of Systematic Transfer Plan:
Example 1
Rahul has a lump sum amount of Rs. 5 lakhs that he wants to invest in mutual funds. He is interested in investing in an equity fund but is unsure about the timing of the market. He decides to invest the entire amount in a debt fund and set up an STP to transfer Rs. 50,000 every month to an equity fund.
Here's how the STP will work:
- Month 1: Rs. 50,000 will be transferred from the debt fund to the equity fund.
- Month 2: Another Rs. 50,000 will be transferred from the debt fund to the equity fund.
- Month 3: Another Rs. 50,000 will be transferred from the debt fund to the equity fund.
And so on...
By the end of 10 months, Rahul's entire lump sum amount will be invested in the equity fund. This way, he can benefit from the potential upside of the equity market while minimizing his risk.
Example 2
Shreya has a lump sum amount of Rs. 2 lakhs that she wants to invest in mutual funds. She is interested in investing in a debt fund but wants to transfer the gains to an equity fund. She decides to invest the entire amount in a debt fund and set up a Capital Appreciation STP to transfer the gains to an equity fund.
Here's how the STP will work:
- Month 1: The debt fund generates a return of 5%. Rs. 10,000 (5% of Rs. 2 lakhs) will be transferred from the debt fund to the equity fund.
- Month 2: The debt fund generates a return of 4%. Rs. 8,000 (4% of Rs. 2 lakhs) will be transferred from the debt fund to the equity fund.
- Month 3: The debt fund generates a return of 6%. Rs. 12,000 (6% of Rs. 2 lakhs) will be transferred from the debt fund to the equity fund.
And so on...
By the end of 10 months, Shreya will have transferred the gains from the debt fund to the equity fund. This way, she can benefit from the potential upside of the equity market while minimizing her risk.
Conclusion
A systematic Transfer Plan is a great investment strategy for investors who want to minimize their risk and optimize their returns. By investing in a debt fund and transferring a fixed amount to an equity fund on a regular basis, investors can benefit from the potential upside of the equity market while minimizing their risk. However, investors should consider their investment objective, risk appetite, market conditions, and fund performance before investing in STP.
