In our earlier article- Systematic Transfer Plan (STP), we have seen what is STP? How does it work? Also, How does STP help in mitigating the market risk while making the lump sum investment in the equity mutual funds. How can STP be implemented by investors in various scenarios? Let us see the applications of STP in this article.
Applications of STP
- STP is majorly used to transfer money from debt funds scheme to Equity schemes. As during volatile markets, you may not feel confident to invest a lumpsum amount in Equities. So, in that case good strategy is to invest the lumpsum in Debt and start an STP to Equity, which spreads your investment in selected time frame. This is a good risk mitigation strategy.
- An STP can also be used to transfer funds from an equity fund to debt, when a goal for which you have been investing for a long term has come within 3 years when you would require the amount. This way you can protect your corpus from possible market fluctuation.
- For instance, say, you initiated an SIP for 30 years into an equity fund towards retirement planning. As you approach your retirement, you can initiate an STP to prevent loss of fund value. Here, you instruct the fund house to transfer a fixed amount from the equity fund to a debt fund. In this way, by the time you retire, you would have moved all the accumulated corpus to a safer haven.
- The main advantage of STP is to mitigate the market timing risk. We know that SIPs are the ideal way to invest in the equity mutual funds because of benefit Rupee-Cost Averaging. Systematic Transfer Plans averages out the cost of investment by buying lesser units at higher NAV and more units at a lower cost. As your money gets transferred from the one fund to another, the fund manager would keep purchasing additional units systematically. Hence, you will get the benefit of rupee-cost averaging i.e. the per-unit cost of investment will fall gradually. We have seen it in detail in our earlier artilcle- What is SIP? The SIP works when you have a regular income and regular savings.
- For the lumpsum investment, we are always looking to invest at the lowest price. But, it is not possible to know whether current price is high or low, compared to the future price.Therefore, the smart investor chooses to invest the lump sum in debt funds and sets STP to the desired equity fund. This way the investor’s money is getting 8-10% returns while it is getting regularly invested in equity funds.
- Many times investors would park their extra money in debt funds so as to get the higher returns than FD along with 100% liquidity. Many active investors take the advantage of sudden falling of the market due to some non-economis reasons. They set STP (with single instalment) to invest a lump sum amount in equity funds on the same day. Within a day the market corrects and comes back to pre-event levels, thus offering a great capital appreciation to their investment.
points to keep in mind for STp
- Moving your money from one fund to another through STP is like selling your units from the first funds and then investing into another. So the usual tax rules apply here too.
- It would not be wise to do STP from equity to debt when the market is at its low, similarly it would not be wise to do an STP from debt to equity when the market is at its high. Do not stop your STP because of temporary market movement or interest rate movement.
- STP can be spread over 2-3 yrs, as 2-3 years is enough to catch a market cycle.
- Entry load is applicable to every STP in and entry load is applicable to every STP out as per applicable to the scheme.
- STP frequency can be weekly, fortnightly, month or quarterly.
- STP can be done between funds of the same fund house.
- Minimum 6 transfers are necessary in STP while minimum lump sum investment varied from fund house to fund house.