
Through
STP, investors can invest lump sum amount in schemes with stable
returns i.e. debt funds and ascertain small exposure in equity schemes,
so as to maximize the chances of wealth creation in long run. STP
operates via investment of a lump sum amount in a debt scheme (100% debt
or with very less equity exposure) and specifying a predefined sum to
be invested in any equity schemes of the same AMC at regular intervals.
The switching can be in reverse fashion also, depending upon the market
scenario. This is in a way similar to SIP (Systematic Investment Plan), resulting in lower risk and higher return.
What is STP?
Systematic
Transfer Plan (STP) enables investors to periodically switch mutual
fund investments from one scheme to another. First scheme from which
money is transferred is called the ‘Source’ scheme and the scheme to
which money is transferred is the ‘Target’ scheme. Both source and
target schemes should be of the same Asset Management Company. On the
date specified by the investor, the amount chosen is transferred from
source scheme to target scheme of investor’s choice. This automatic
switching repeats itself at pre specified frequencies till the tenure
ends.
Benefits of STP
Concepts
of SIP and SWP (Systematic Withdrawal Plan) were introduced basically
to minimize the risk of timing the market and maximize the return at the
same time. Systematic transfer plan functionally is a combination of
SIP and SWP, which has following benefits:
- Optimum balance of risk and return - STP ensures consistent return with capital appreciation potential, which is not possible if investment in either debt or equity scheme is done. Individually, debt funds lack capital appreciation potential while equity funds returns are unpredictable in nature.
- Investment Cost Averaging - As mentioned earlier, STP is equivalent to SIP + SWP, hence you keep on buying more number of less costly units and less number of more costly units. This ultimately lowers your cost resulting in enhanced returns.
- Portfolio Rebalancing – Investing through STP automatically rebalances portfolio between debt and equity. If your portfolio is debt heavy, STP keeps on allocating more money towards equity funds and vice versa.
Best Time to Invest through STP
There are basically two modes by which you invest in STP.
First
case - Source fund is a debt fund and target fund is an equity fund. In
this case, investment through STP is recommended when equity market is
trading around its peak and future uptrend doesn’t seem likely. In this
way, you get to buy equity fund at cheaper valuation in future.
Second
case - Source fund is an equity fund and the target fund is a debt
fund. In this case, investment through STP is recommended when equity
market is trading around its bottom and future downtrend doesn’t seem
likely. In this way you keep on booking profit in equity fund as the
market goes up and at the same time your money gets invested in a debt
fund with more consistent returns in future.
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Source : investmentyogi
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