What is an STP Plan? Are They Relevant For You?

What is an STP Plan

Systematic Transfer Plan (STP) means a strategy in which an investor can transfer a fixed amount of money from source scheme to target scheme. This usually happens from a debt fund to an equity fund. Nowadays, several financial experts recommend STP to mitigate potential risks. Unlike SIP, STP might not be a term which the investors have heard. While SIP means transfer of money from savings bank account to a mutual fund plan, STP focuses on transferring money from one MF plan to another.  Systematic Transfer Plan is a smart strategy to stagger the amount of investment over specific terms to reduce risks and balance returns. 

For example, if an investor invests ‘systematically’ in an equity fund, he/she can earn risk-free returns despite volatile markets. The asset management company allows an investor to invest a lumpsum in one fund, and then initiate a transfer of a fixed amount to another scheme on a regular basis. Former fund is called the source scheme, and the latter fund is referred to as the target scheme.

Features of a Systematic Transfer Plan

  • Balancing your investment: Systematic Transfer Plan helps in rebalancing portfolio by transferring investments from debt fund to equity fund or vice versa. Therefore, investors can allocate capital according to their own risk appetite and financial objectives.
  • Cost Averaging: STP has some renowned features of Systematic Investment Plan. One of the main differences between STP and SIP is the source of investment. In the former, money is transferred usually from the debt fund and in the latter, it is the bank account of an investor. Just like SIP, STP also helps investors to gain from rupee cost averaging.
  • Aims for Higher Return: Money which is invested in debt funds yields returns till it is present in the debt fund. Generally, returns in debt funds are greater than savings bank accounts. Therefore, investment in debt funds can deliver relatively better performance. 
  • Steady returns and risk management: Returns made with the help of STP strategy are reliable. This is because the amount which is present in the source fund (debt fund) is able to generate interest till the transfer is made. Investors can use STP to move from risky asset class to less risky asset class. For example, an investor has initiated SIP for 30 years into an equity fund. This forms part of his retirement planning. As this investor approaches retirement, he can initiate the process of transfer though STP. This should help in prevention of loss of fund value. In this case, the fund house allows him to transfer a fixed amount from equity fund to the debt fund. If this is followed in a disciplined manner, by the time of retirement, this investor would have moved all accumulated corpus to the less-risky asset class. 

Systematic Transfer Plans: Are they relevant for you?

Systematic Transfer Plan is mainly for investors looking to invest a lumpsum amount but they are not ready to do that at one go. This can be because they have lower risk appetite and are afraid of market volatility. Such investors can decide and go for liquid or debt funds. When the invested money is transferred to an equity fund, investors get fixed returns from debt funds and potential returns from their equity investment too.