Systematic Transfer Plan

Transferring a fixed amount from one mutual fund scheme into another scheme is known as STP or Systematic Transfer Plan. STP can be triggered by the investor (or unit holder) to meet one or more financial objective.

  • Regular STP: Normally an STP is used for investing a lump sum money when the market is either volatile or valuations are expensive. An investor with lump sum money is always at a risk if the stock market goes south. One shot investment is at a considerable risk of capital erosion. This is where STP comes in as a great risk mitigation tool. Investors can choose a liquid fund and invest the entire corpus in the liquid fund. Subsequently, the amount can go from liquid fund (Through Systematic Transfer) to the equity fund. This has several advantages. Firstly, Liquid fund invariably gives returns that is more than a regular savings account. Secondly, in case of volatility or a downturn STP investor will end up buying in an equity fund when the NAV is beaten down. Also, the key feature of SIP i.e., rupee cost averaging, works in STP as well.
  • When NAV hits a certain number: Certain AMC’s provide a feature in STP form that enables Investors to shift from one scheme to another in case NAV hits a certain figure. In case of a perpetual bull run, Certain risk averse investors might want to opt out of an aggressive equity scheme and enter a safe debt fund. STP enables an investor to pre-decide the amount to be shifted when the NAV hits a certain number. Alternatively, in case the markets go down, an investor might choose to trigger STP if the NAV falls below a certain number. This is a smart mechanism when an investor might want to transfer funds from a debt fund to an aggressive equity fund in case the markets are down. Subsequently benefitting from the upside when the markets revive.

This is how an investor can make the best use to STP

  • Define your risk appetite and the amount to be invested. Also, define the period for which investment is to be made. Please note that STP works best in case of lumpsum investment.
  • Choose the target funds (normally equity funds) and the liquid funds from the same AMC.
  • Choose the frequency of systematic transfer from source scheme (liquid funds) to target scheme (equity funds).
  • Fill out the form. Make sure that the STP period is neither too short nor too long. Historically, STP works best when the markets have been rising for preceding 2-3 years and valuations are expensive.
  • Regularly monitor the investments. You may alter the schemes or the tenure of STP anytime.

Advantages of STP

  • Analogous to SIP: It also works like a Systematic Investment Plan (SIP) as you can invest in a Debt fund and start an STP to an Equity Fund from there.
  • Works as Systematic Withdrawal Phase: When markets are expensive, STP works like Systematic Withdrawal Plan because as you can transfer from Equity to Debt.
  • Liquidity: Initially, investment is in Debt fund but STP transfers it from Debt to Equity. This makes the complete exit convenient. In case of an emergency, you may exit completely from debt fund. Hence debt portion in an STP acts as a liquid asset (only for a finite period of time though).

When is STP ideal

As already stated, when valuations are expensive and/or market volatile. That is the time when STP is a brilliant decision. Plus, returns on the debt component in STP is any day better than any bank deposit.

When does STP not Work

STP will be futile if markets are either in bear phase or fag end of the bear hug. Bearish markets call for lump sum investment.