What is STP?
STP is an acronym for Systematic Transfer Plan. Its a process to move investment from one mutual fund to another. Typically, one invests a lump-sum amount in a debt mutual fund. Then creates a request to move the investment into one or more equity mutual funds.
The better way to understand STP is to consider it as a SIP but not directly from your bank account but from another mutual fund instead. It can be the returns from the other fund to move or can even be the capital invested as well.
All one has to decide is how much to transfer and when. The typically available options are weekly, monthly, or quarterly STP.
Because STP is SIP, it has all the benefits of SIP. Reduces the risk of timing the investment in the equity market and rupee cost averaging to buy fewer units when NAV is higher and more units when NAV is lower.
Key Points to Remember For STP
Some of the key points to consider for STP are:
- STP can only happen between the mutual funds of the same fund house.
- STP is redeeming from one fund and purchase in another, on the same day. So the returns from the redeeming fund may be subject to taxation.
- Opt for lump-sum investment in funds that have no exit load.
- Check if you have an option to STP to a direct fund and don’t have to opt for a regular fund. Read How to Invest in Direct Mutual Funds – A Step by Step Guide
When to Opt for STP?
STP is a better option when one is considering to invest in the market but is afraid that the market is at all time high or very elevated levels.
So then it becomes a better choice to invest a lump-sum amount in a debt fund and then opt for an STP into equity mutual fund.
Who Should Opt for STP?
STP is not for everybody. Because STP is when the equity market is making new highs. So according to me, the investor who is more concerned about capital protection and still wants to consider equity should opt for STP.
In this article here, I have shared a complete process of how one can invest in equity and protect his capital as well.
So if you are more concerned about the erosion of capital investing in equity, consider STP. If you are fine with 10% to 30% shave off in capital at any given point of time, you should be fine investing in index funds or ETFs the lump-sum amount instead of going the STP route.
Who Shouldn’t Opt for STP and Why I don’t Opt for STP?
I am not a fan of investing in debt funds because I am ok with the volatility of the equity market. I don’t recommend it to others because every investor is different.
If you have seen the article on capital protection, you will see some investors will opt for 80% allocation in debt and others will opt for 50%. I prefer 100% in equity, and as long as I know the risks, I should be fine. I am a small investor and want to build wealth investing in the market. So, I need to take more calculated risks.
STP is a way to protect capital and still invest in equity, but it also means subdued performance.
I prefer to invest more in moderate risk and volatile options for better than average returns. It is the same as to Why I Avoid Investing in Mutual Funds as well but You Shouldn’t?.