IN Systematic Transfer Plan (STP), an investor is able to invest a lump sum in mutual fund with the option of transferring the fixed or flexible amount into a different scheme. An investor can park the money in any debt mutual fund scheme, from which fixed or variable sum gets transferred into an equity-oriented mutual scheme at a periodic interval. It means that the units equivalent to the transferred amount will be sold from primary debt mutual fund schemes and the same amount will be used to buy units of the chosen equity mutual fund scheme. One can use the STP for investing in several schemes at the same time.
Why is it useful?
It helps in re-balancing the portfolio by helping an investor to switch investments from debt to equity or vice-versa. If investment in equity-oriented schemes increases, money can be reallocated to debt funds through STP, and if investment in debt goes up, you can switch to equity-oriented schemes.
Returns in STP are consistent as money invested in debt mutual fund schemes earns interest till the time the whole amount is fully transferred to equity fund. Also, returns in debt mutual fund schemes will be higher than the fixed interest of your savings bank account. It is useful for people whose cash is lying idle in the bank account as any lump sum amount invested in debt MF will fetch higher returns than when lying in bank savings account.
Types of STP
There are two types of STP – fixed and flexible. In fixed STP, the transferable amount will be fixed and preset by the investor at the time of investment and the same amount will be transferred at periodic intervals. In flexible STP, an investor has the option to transfer variable amounts on a daily, weekly, monthly and quarterly basis.
What to avoid
Your choice is limited to the schemes of the asset management company. So it is better to go with those fund houses which have many options in debt and equity mutual fund schemes.
The writer is senior VP & group head, Marketing, Bajaj Capital