What is STP in Mutual Funds?

30 Jan 2025

Investors often seek answer to; What is STP in mutual fund and how does it help in managing the risk? In Mutual Fund Investing, STP refers to Systematic Transfer Plan that allows you to transfer a fixed amount of monies from one mutual fund scheme to another within the same fund house on a specified day of the month.

STP can be perceived as a risk management strategy, often set up to shift investments from one type of fund to another (e.g., from debt to equity or vice versa) based on market conditions. Typically, investors use STP to move funds from a low-risk or debt-oriented scheme (like a liquid fund) into a higher-risk or equity-oriented scheme.

It is particularly useful when you have a large sum to invest but are uncertain about market fluctuations, allowing you to spread your investment over time and reduce the risk of investing a lump sum all at once.

STP can be perceived as a risk management strategy, often set up to shift investments from one type of fund to another (e.g., from debt to equity or vice versa) based on market conditions. Typically, investors use STP to move funds from a low-risk or debt-oriented scheme (like a liquid fund) into a higher-risk or equity-oriented scheme.

How do Systematic Transfer Plans works?

After understanding what is STP in mutual fund, the investor can look at further nuances of how it works in a practical scenario. A Systematic Transfer Plan (STP) allows you to automatically transfer a fixed amount from one mutual fund to another within the same fund house at regular intervals. Typically, it is used to move funds from low-risk debt schemes to higher-risk equity schemes, helping manage risk and facilitate market timing. To set up an STP, you make a lump sum investment in a mutual fund scheme and instruct the fund house to transfer a fixed amount to the target scheme at regular intervals. Over time, your investments in the source scheme gradually decreases, while it increases in the target scheme, continuing until the entire amount has been transferred.

Types of Systematic Transfer Plans

1. Flexible STP: This type of STP offers flexibility by allowing the transfer amount to vary based on your financial goals and market conditions. You can adjust the transfer amount or frequency according to your risk tolerance and market outlook.

2. Fixed STP: In a Fixed STP, a fixed amount is transferred regularly from one mutual fund Scheme to another Scheme of the Mutual Fund house. It provides a disciplined and consistent investment approach, making it suitable for investors seeking a structured savings approach.

3. Capital Appreciation STP: With this approach, the capital gains from an existing fund are systematically moved to a different fund. It’s suitable for investors seeking option to safeguard the capital and take risk with the gains made over time periods.

Features of Systematic Transfer Plans

1. Aims for Balancing Your Investment

STP in mutual fund investments help you to gradually shifting funds between different asset classes (e.g., from debt to equity or vice versa) based on your financial goals and market conditions. It allows you to manage risk in an effective manner by adjusting your portfolio over time, rather than making a lump-sum move.

2. Rupee Cost Averaging

STP works on the principle of rupee cost averaging, where you transfer a fixed amount periodically. This strategy helps you mitigate the risk of market timing, as you buy units at different prices over time, which can reduce the average cost of investment and hence provide a cushion from impact of market volatility.

3. Aims at Potential Returns

By transferring funds from low-risk debt funds to high-growth equity funds, STP allows you to aim for potential returns over time. Since equity funds tends to generate better returns compared to debt funds in the long run (5+ years), this strategy allows you to take advantage of market growth in a phased manner.

4. Structured Approach

STP offers stability by gradually increasing exposure to equities or moving funds to safer assets depending on market conditions. This structured approach ensures that you don’t take undue risks.

How to set up STP?

To set up STP in mutual fund scheme:

1. Invest a lump sum in a source scheme (e.g., debt fund or hybrid fund).

2. Choose a target scheme (e.g., equity fund) for transfer.

3. Specify transfer amount and frequency (e.g., weekly, monthly, quarterly).

4. Fill out the STP form with source, target schemes, amount and frequency.

5. Submit the form to the mutual fund house for processing.

6. Monitor your STP and adjust as and when required.

Who should invest in Systematic Transfer Plan?

A Systematic Transfer Plan (STP) is suitable for investors with a lump sum amount who want to spread their investment over time to reduce market timing risks. It suits conservative or risk-averse investors who prefer gradually shifting from low-risk debt funds to higher-risk equity funds. STP is also beneficial for long-term investors seeking a structured, disciplined approach aiming for long term wealth creation for meeting their financial goals.

Things to Remember when Investing with a Systematic Transfer Plan

1. Choose the Right Source and Target Funds: Ensure your source fund (e.g., debt) aligns with your risk profile, and the target fund (e.g., equity) matches your long-term financial goals.

2. Monitor the Transfer Amount: Regularly review the transfer amount and frequency to make sure it aligns with your financial objectives and market conditions.

3. Tax Implications: While STP doesn’t trigger immediate tax on transfers, capital gains taxes may apply when you redeem from the target fund.

4. Stay Committed for Long Term: STP works best when executed over an extended period, so avoid changing the plan frequently due to short-term market fluctuations.

FAQ’s

1: What is the full form of STP?

The full form of STP is Systematic Transfer Plan, a strategy where funds are gradually moved from one mutual fund Scheme to another Scheme within Mutual Fund house.

2: How Does a Systematic Transfer Plan Help Manage Volatility?

A STP helps manage volatility by spreading investments over time and averaging the cost of acquisition in the target scheme which is typically the vehicle for long term wealth creation. This further reduces the impact of market fluctuations on your portfolio.

3: How to Set Up a Systematic Transfer Plan?

To set up a STP, fill out the necessary form with details such as the source and target funds, the amount to be transferred and define the frequency. Submit this form to your fund house, such as Kotak Mahindra Mutual Fund.

4: Is STP Better Than SIP?

Whether STP is better than SIP depends on your financial objectives. Opt for Systematic Investment Plan (SIP) if you prefer regular investments directly into the mutual fund scheme (typically an equity scheme) for long term wealth creation. Choose STP if you have a lump sum amount and want to transfer funds gradually over time in a disciplined manner.

Disclaimers

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

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