Investing in mutual funds has become a popular way to grow wealth. Among the various strategies investors use, the Systematic Transfer Plan (STP) is a common choice for those with a lump sum amount. This article will explain how STP works and highlight its differences from the more well-known Systematic Investment Plan (SIP).
What is a Systematic Transfer Plan (STP)?
An STP is an automated method of transferring funds from one mutual fund scheme to another. This strategy is typically used by investors who have a lump sum amount but want to avoid market timing risks. Usually, funds are transferred from a debt scheme. This is because debt schemes are considered safer when compared to an equity scheme, which offers higher returns but also comes with more risk.
How Does an STP Work?
Imagine an investor with INR 10 lakh who is hesitant to invest directly in an equity fund due to market volatility. Instead, they invest the lump sum in a debt fund, which offers a decent rate of return and is safer. The investor then sets up an STP to transfer money regularly from the debt fund to an equity fund. This way, the equity fund receives regular investments, similar to an SIP, but the funds come from the debt fund instead of the investor’s bank account.
Benefits of an STP
One of the main advantages of an STP is that it mitigates the risk of market timing. Equity markets can be volatile, and investing a lump sum during a market downturn can result in significant losses. With an STP, only a portion of the money is transferred to the equity fund at regular intervals. This reduces the impact of market fluctuations. The money in the debt fund continues to earn interest until it is transferred. An additional return it provided due to this.
Who Should Consider an STP?
STPs are suitable for investors with a large corpus of savings. If you receive regular payments, a SIP might be a better option. Investors with a low to medium risk appetite can benefit from STPs. As they offer a balanced approach to investing. However, those with a high-risk appetite may prefer to invest a lump sum directly in an equity fund. They can aim for higher returns despite the increased risk.
Setting Up an STP
To set up an STP, choose the debt fund to invest your lump sum in and select the equity funds you want to transfer money to. Decide on the frequency (weekly, monthly, quarterly) and the amount of each transfer. Your portfolio should be diversified and aligned with your financial goals and risk tolerance. Low-risk investors might transfer funds to large-cap or index funds, while those seeking higher returns can opt for small-cap or mid-cap funds.
STP vs. SIP: Key Differences
While both STP and SIP involve regular investments in equity mutual funds, the source of the funds differs. In an SIP, money is deducted from your bank account. In an STP, funds are transferred from a debt fund. STPs can offer higher returns because you earn returns from both the debt and equity funds. In contrast, SIPs provide returns only from the equity fund, with bank account interest rates being negligible.
Taxation Differences
Taxation also varies between STPs and SIPs. Every transfer from a debt fund to an equity fund in an STP is considered a redemption and is subject to short-term capital gains tax. In an SIP, taxes depend on the holding period of the equity funds, with both long-term and short-term capital gains taxes applicable.
An STP is a great way to invest a lump sum in equity funds, especially in volatile markets. It offers the dual benefits of debt fund returns and equity fund growth. However, if you don’t have a large corpus, a SIP might be more suitable. Both strategies have their advantages, and the choice depends on your financial situation and investment goals.
Disclaimer
The content of this article is only for informational purposes and we do not offer any investment advice from our end. Please consult a SEBI-registered investment advisor before making any investment decision. The information does not necessarily reflect the views/opinions of the publisher.
About the Author
Mr. Radhesh Tarang Shah, is a management student at Institute of Management, Nirma University. He has a passion for writing articles and poems. He has experience as a financial analyst, author, news writer, marketer and social worker.
