Systematic Transfer Plan: A smart way to invest in mutual funds

A comprehensive guide on how to use STPs to achieve your investment goals.

A Systematic Transfer Plan (STP) is a mutual fund investment strategy that allows you to transfer a fixed amount of money from one mutual fund scheme to another at regular intervals. STPs are a great way to invest in mutual funds in a disciplined and systematic manner. They can also be used to rebalance your portfolio and reduce your risk. 

How does STP work? 

When you set up an STP, you specify the source scheme, the target scheme, the amount to be transferred, and the frequency of transfer. The source scheme is the scheme from which the money will be transferred, and the target scheme is the scheme to which the money will be transferred. The amount to be transferred can be a fixed amount or a percentage of the NAV of the source scheme. The frequency of transfer can be daily, weekly, monthly, quarterly, or annually. 

Once you have set up an STP, the mutual fund company will automatically transfer the specified amount of money from the source scheme to the target scheme at the specified frequency. This will continue until you cancel the STP. 

Benefits of STP 

There are several benefits to using STPs: 

Disciplined investing: STPs help you to invest in mutual funds in a disciplined and systematic manner. This is important because it helps you to avoid making emotional investment decisions. 

Risk reduction: STPs can help you to reduce your risk by diversifying your portfolio. When you transfer money from the source scheme to the target scheme, you are essentially investing in two different schemes. This helps to reduce your overall risk. 

Rebalancing: STPs can help you to rebalance your portfolio. Rebalancing is the process of adjusting your asset allocation to align it with your investment goals and risk tolerance. STPs can be used to automatically rebalance your portfolio by transferring money from the source scheme to the target scheme at regular intervals. 

Tax efficiency: STPs are tax efficient. When you transfer money from one mutual fund scheme to another, you are essentially redeeming units from one scheme and investing the proceeds in another scheme. This is considered a switch, and switches are not taxable. 

How to choose the right STP for you 

When choosing an STP, there are a few things you need to keep in mind: 

Your investment goals: What are your investment goals? Do you want to save for retirement, buy a house, or build a nest egg for your child's education? Your investment goals will determine the type of STP you choose. 

Your risk tolerance: How much risk are you willing to take? STPs can be used to invest in both high-risk and low-risk schemes. The type of STP you choose will depend on your risk tolerance. 

The performance of the source and target schemes: You should compare the performance of the source and target schemes before setting up an STP. You should also consider the risk-adjusted returns of the schemes. 

The exit load: Some mutual fund schemes charge an exit load if you redeem your units before a certain period of time. You should factor in the exit load when choosing an STP. 

Example of STP 

Say you want to invest in equity funds, but you are concerned about the volatility of the equity market. You can use an STP to reduce your risk. You can set up an STP to transfer a fixed amount of money from a Debt Fund to an equity fund at a regular interval. This will help you to invest in equity funds in a disciplined and systematic manner. It will also help you to reduce your risk by averaging out your purchase price. 

Tips for using STPs 

Start small: You can start with a small amount of money when setting up an STP. This will help you to test the waters and see how STPs work. Once you are comfortable with STPs, you can increase the amount you transfer. 

Review your STP regularly: You should review your STP regularly to make sure that it is still aligned with your investment goals and risk tolerance. You may need to adjust the amount you transfer or the frequency of transfer based on your changing circumstances. 

Use STPs to rebalance your portfolio: You can use STPs to rebalance your portfolio automatically. For example, you can set up an STP to transfer money from an equity fund to a debt fund when the equity market becomes overheated. This will help you to maintain your desired asset allocation. 

Conclusion 

STPs are a great way to invest in mutual funds in a disciplined and systematic manner. They can also be used to rebalance your portfolio and reduce your risk. If you are new to mutual funds, I recommend that you consult with a financial advisor before setting up an STP.