WHAT IS A SYSTEMATIC TRANSFER PLAN (STP)?
STP is a method to stagger money typically from a liquid fund to an equity fund over a period of time. An investor with cash wanting to make a lump sum investment but worried about near-term corrections uses this method. The twin advantage is that you make returns from the liquid fund and simultaneously stagger money into your equity fund.
HOW DOES IT WORK ?
To start an STP, you put in a lump sum amount in a debt scheme (typically a liquid or ultra short-term fund) and transfer a predefined amount into another scheme, typically an equity fund. The scheme in which the lump sum investment is made is called a ‘source scheme’ or ‘transferor scheme’ and the scheme to which the amount is transferred is called ‘destination scheme’ or ‘target scheme’ or ‘transferee scheme’. Generally investors do this exercise for a period ranging from six to twelve months. Many of them transfer some money every week using this strategy.
HOW DOES ONE START AN STP?
The first step is to choose which liquid /ultra short-term you will put money into and the equity fund, which you ultimately want to invest in. Both these funds need to be from the same fund house. Most fund houses have a daily, weekly or monthly option to transfer money. For example, an investor can decide to transfer Rs 2,500 every week to an equity fund or even something like Rs 10,000 every month
WHAT IS THE BENEFIT OF STAGGERING INVESTMENTS USING AN STP?
The big benefit of using an STP is that till the time the money remains invested in a liquid/ultra-short term fund, it earns an extra return, which is generally higher than that of a savings bank account. Currently investors could earn 4.5-5% in a liquid fund. In addition, STP helps in averaging out the cost due to volatility in the stock market. Some investors use this method to rebalance portfolios. If your investment in debt increases, money can be reallocated to equity funds through a systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund, using STP.