Investors are demurring each day for lump sum investments because of the different risks tagged with the market. This is the reason why we as a financial expert recommend STP in order to mitigate risks. Systematic Transfer Plan can be termed as simple transmit procedure wherein an automated movement or transferring of money from one fund to another. This plan works when any investor wants to invest in a lump sum but on the other hand wants to avoid the volatility risk. The most trending way of STP is to transfer from a debt to an equity fund. STP is a resourceful strategy to wobble investments over a pre-set tenure to limit risks and gain returns.
If one invests systematically in equities, one can earn risk-free in the highly volatile markets. The former fund is referred to as source scheme or transferor scheme, and the latter is called the target scheme or destination scheme. Everybody is aware, Debt funds wherein the returns can be predictable. Equity funds or growth funds are market linked wherein the returns are unpredictable in the short-term but have been high when invested for the long-term. It is notable that the STP can be performed within the same fund house only.
Why Do Systematic Transfer Plan
Majorly, any STP is made to de-risk the volatility risk. The witty investors invests the lump sum in debt funds and sets STP to the desired equity fund. This way the investor’s funds are earning 8-10% (approx.) returns. We can understand why to do STP by following pointers.
- There is no pre-set minimum investment amount to be invested in any source fund. But some AMCs urge for Rs.12, 000 as a minimum amount in STPs.
- STP emphasizes on a disciplined transfer of funds and mostly, investors initiate STP from a debt to an equity fund.
- STP comes with the tax implications on the transfer. Each transfer is considered as redemption and a new investment which is usually taxable. The amount transferred within the first three years from a debt fund is subject to short-term capital gains tax.
Benefits of STP
Surpassing Returns
Investors initially invest the lump sum in a debt fund like a liquid fund which yields 7-9% as compared to 4% in a savings bank account.
Patterned Returns
The returns earned from STP are very much reliable. As the source fund says a debt fund generates capital gains until one transfers the entire amount.
Mitigating Risks
An STP can also be used to move from a risky asset class to a less risky asset class. STP is common in or before retirement to prevent loss of fund value. By the time one retires, investors would have shifted the corpus to a safer anchorage.
Rupee Cost Averaging
STP median out the cost of investment by buying lesser units at higher NAV and more units at a lower price. The per-unit cost of investment will decline with time.
Squaring-off Portfolio
The portfolio must plant a balance between debt and equities. The STP re-balances the portfolio by moving investments as required.
Types of STP
Fixed STP is where the amount and frequency of transfer are fixed.
For Capital Appreciation of STP, only the capital appreciated is transferred from source fund to the destination fund, and the capital part remains safe.
Flexi STP is flexible wherein an investor transfers a varied amount from the source fund to the target fund.
Things to Remember
STP is suggested for an investor to invest in a lump sum amount that is not required in the immediate future. Risk is unavoidable but STP seems to be the most candid and disciplined risk-reducing approach that investors adopt.
We at MyFinopedia always keep an eye on the phases of underlying assets. It is irrational to transfer capital, when the market is at its peak. STP is opted to manage risks without affecting vital returns.
MyFinopedia offers you handpicked funds from the top fund houses. Any investor initiating to invest through a STP, then he/she can choose one of the plans that suit the requirements. Start investing now!
