WHAT IS A SYSTEMATIC TRANSFER PLAN?
STP is a way to stagger money typically from a liquid or ultra-short-term 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 big advantage is that you earn a return from the liquid/ ultra-short-term fund and simultaneously stagger money into your equity fund.HOW DOES AN STP WORK? To start an STP, you need to put in a lump sum amount in a debt scheme (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’. Typically investors do this exercise for a period ranging from six to twelve months. Investors could transfer this money daily, weekly or monthly using this strategy.
WHAT IS THE PROCESS TO START AN STP? The first step is to choose the liquid /ultra-shortterm fund to park your money in and the equity fund in which you ultimately want to invest. Both these schemes 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 `2,500 every week to an equity fund or even something like `10,000 every month.
HOW DOES AN INVESTOR BENEFIT BY USING STP? The big benefit of using an STP is that till the time the money remains invested in a liquid or ultra-short-term fund, it earns an extra return, which is generally higher than a savings bank account. Currently, investors could earn 7-8% returns in such funds. In addition, STP helps in averaging out the cost due to volatility in the stock market. Some investors use this route to rebalance portfolios. If your investment in debt increases, money can be reallocated to equity funds through STPs, and if investment in equity goes up, money can be switched from equity to debt funds using STP.
