STP: SYSTEMATIC TRANSFER PLAN

 Published By:- 

Anand (B.Tech, M.Tech, MBA Finance) 

Mob :- 9415283904

SYSTEMATIC TRANSFER PLAN: Investment Strategy Explained

1.    A Systematic Transfer Plan (STP) is an investment strategy that allows investors to transfer a fixed amount of money periodically from one mutual fund scheme to another within the same mutual fund house. It is a disciplined approach that enables investors to reallocate their investment portfolio based on their investment goals, risk tolerance, and market conditions.

Here's how a Systematic Transfer Plan works:

2.  Choosing the Funds: 

The investor selects two mutual fund schemes from the same fund house: the source scheme and the target scheme. The source scheme is the fund from which the investor transfers funds, while the target scheme is the fund where the money is transferred.

3.   Transfer Frequency and Amount: 

The investor decides the transfer frequency (monthly, quarterly, etc.) and the transfer amount. The transfer can be a fixed sum or a fixed number of units. For example, an investor may choose to transfer Rs500 every month from the source scheme to the target scheme.

4.    Initial Investment: 

The investor needs to make an initial investment in the source scheme. This amount can vary depending on the fund house's requirements.

5.   Transfer Options: 

There are two types of STP options:

(a)  Capital Appreciation Option: 

Under this option, the appreciation in the value of units in the source scheme is transferred to the target scheme. The investor's capital remains invested in the source scheme, and only the profits are transferred.

(b)Appreciation and Redemption Option: 

With this option, both the appreciation and redemption proceeds from the source scheme are transferred to the target scheme. Here, the investor's capital is gradually moved from the source scheme to the target scheme.

(6)  Execution: 

The STP is executed by the fund house based on the investor's instructions. The predetermined transfer amount is deducted from the source scheme, and units are purchased in the target scheme at the prevailing Net Asset Value (NAV) of that day.

 

7.  Benefits of Systematic Transfer Plan:

Rupee Cost Averaging: 

STP helps investors implement the rupee cost averaging strategy. By transferring a fixed amount at regular intervals, investors buy more units when prices are lower and fewer units when prices are higher. This reduces the impact of market volatility and potentially improves returns over the long term.

Asset Allocation: 

STP allows investors to gradually rebalance their investment portfolio. They can shift funds from equity-oriented schemes to debt-oriented schemes or vice versa based on market conditions or their investment objectives. This flexibility helps in diversifying the portfolio and managing risk.

Systematic Investing: 

STP instills discipline in investors by encouraging regular and consistent investments. It eliminates the need for timing the market and reduces the impact of emotional decision-making.

Tax Efficiency: 

If the transfer is between two schemes of the same fund house, it is treated as a switch rather than a redemption and purchase. This can potentially provide tax advantages compared to selling and repurchasing units.

8.   It's important to note that while STP can be a useful investment strategy, when the stock market is at its peak. The funds that have gained substantial profit should be shifted to Debt funds in order to preserve the profits accrued. 

9.  Investors should carefully evaluate their investment objectives, risk tolerance, and consult with a financial advisor before implementing an STP or any investment strategy.