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.
1. 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.
2. 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.