Optimization of your mutual fund investments using STP

What is an STP?
Nowadays most of investors are familiar with SIP (Systematic Investment Plan). There is one another important term which also very useful for mutual fund investors is STP- Systematic Transfer Plan
STP is a Systematic Transfer Plan which helps investors to transfer money from one scheme to another in the same fund house at periodic intervals. To do so one has to fill and submit the STP registration form to the mutual fund.

Difference between SIP and STP
SIP transfers money from saving account to mutual fund, while STP transfers money from one mutual fund to another mutual fund.

Why STP?
STP is used by investors for optimal use of funds. STPs are usually set up by individuals with a lump sum amount to invest. Then these individuals invest in a liquid fund and transfer the money occasionally to an equity fund. These individuals authorise investors to invest a lump sum amount in one fund and transfer regularly a pre-defined amount into another fund within the same fund house using Systematic Transfer Plan.
This strategy is used by the investor who wants to invest methodically in equity mutual funds, especially during volatile equity market conditions, and gain risk free returns by investing in liquid ultra short term schemes.

Some basic terms of STP
The scheme for lump sum investment is given names like `transferor scheme’ or `source scheme’, and the scheme to which the amount is transferred is named as `transferee scheme’ or `destination scheme’ or `target scheme’.
STPs can be monthly, fortnightly, weekly, or daily intervals.
STP helps to lurch investment over a period of time and maintain a balance of risk and return.
Many often, investors invest the lump sum amount in a liquid ultra short term fund and transfer it to an equity balanced fund.
Transferring money to an equity fund from liquid or debt fund is the most common way of doing STP.

How STP works?

In STP, first of all investor invests a fixed amount of money in a particular fund. Then the money is deducted from that fund to another fund whichever chosen by an investor.

I have one scenario to explain benefits of STP. An investor has 10lakh and he wants to invest in mutual fund. In that scenario, Should he invest 10lakh lump sum in equity fund? Answer is No. This is not appropriate method of investment. Let me explain you why. If he invests 10lakh lump sum in equity fund and after a month what if market falls? There will be a big loss to him. The best method is to invest 10lakh in liquid or debt fund and then systematically invest in equity funds. This will reduce risks even if market is volatile as he is investing monthly or quarterly. His investment would get benefit of averaging.

Example: If an investor has 10 lakhs to invest and he wants to invest in HDFC Top 200(Equity Fund).
First of all he would choose a good Debt fund from HDFC in which he would invest 10lakh.
Then from this invested amount in Debt fund, he would choose 10k, 15k, 20k or any amount per month STP from HDFC Debt fund to HDFC Top 200.

There is one another way of using STP. Let’s say you have done SIP for 20 years to achieve your goal like daughter’s marriage or child education. After 20 years you need that money. In that case if 2 or 3 years before, you start STP from equity mutual fund to debt fund then you can also minimize risks of your investment and get better return. This method will beneficial when at the time of your redemption market get volatile.

Can I do STP from one AMC to another?
There are some factors to understand before answering that question.
-STP occurs between the different schemes of mutual funds of the same fund house (AMC).
-By STP one can redeem one fund and purchase in another on the very same day.

The answer of above question is – No. STP can be done into same AMC, like from Reliance to Reliance, not in to two different fund houses from Reliance to HDFC.
So, obviously the answer is as clear as day light itself. You can’t switch a STP from one AMC to another. STP is just to help you transfer your money from one fund to another fund in the same fund house with some periodical intervals.

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