STP – Meaning, Types, and Benefits

Features of STP

A systematic transfer plan (STP) enables investors to switch their investments from one mutual fund scheme to another. Investors need to specify the source and the target schemes while registering for an STP. The source scheme is from where the investments are switched and the target scheme is where the switched amount is to be invested.

How does STP work?

➣ Investor needs to invest in the source scheme either as a lump sum investment or a systematic investment plan (SIP)

➣ Register for the switch the investment at regular intervals outlining the amount or the number of units to be transferred

➣ On the STP date, the specified amount is transferred to the target scheme until the entire initial investment amount is completely redeemed

Types of STPs

➣ Flexible STP: Investors determine the transfer amount as per their requirements or based on market conditions to switch from a high-risk scheme to a lower-risk option

➣ Fixed STP: The amount to be transferred is fixed by the investors at the time of registering the STP

➣ Capital appreciation STP: The returns earned from investing in the source scheme are transferred to another scheme that may potentially deliver higher returns

Benefits of STPs

➣ Higher returns
During market swings, investors can switch to more lucrative schemes to potentially increase their return on investments

➣ Rupee cost averaging
STPs average the purchase costs for investors by taking advantage of market conditions. When the prices are lower, investors may execute purchase and sell these when prices increase to benefit from capital gains

➣ Stability
During high volatility in the stock markets, investors may switch their equity mutual fund investments to relatively safer options like debt or money market funds. This reduces their risk while enabling them to earn stable returns on their investments

➣ Optimal balance
The best STPs aim to build an ideal portfolio of debt and equity assets to offer an optimal balance between risk and returns. Risk-averse investors may switch to debt funds while those willing to assume higher risks may choose equity funds

Things to bear in mind while choosing STP

STPs are beneficial in the long-term and investors may not see immediate returns on their investments. While choosing the STP, individuals also need to consider the exit load and tax implications to make an informed decision. While STPs may mitigate market-related and other investment risks, investors must remember that these cannot be completely eliminated.

STPs are risk management strategies that help to stabilize investment portfolios. It may help investors build wealth over the long-term by investing in low-risk schemes.

SRH Wealth Management is among the pioneers in designing the most advantageous STPs for its clients. Over the last two decades, our experts have delivered exceptional returns to investors. To know more, visit our website or connect with us here.