STP stands or Systematic Transfer Plan is basically an automated way of moving (transferring) money from one mutual fund to another.

Investors have a lot of options to invest their money. They can do so at lump-sum or via fixed periodical investments in the form of Systematic Investment Plan (SIP).

These are some of the tools an investor can use to effectively and efficiently use to manage and invest his/her money better. The use of the appropriate tool depends upon the requirement and investment objective of the investor.

1. STP Is Moving Money from One Mutual Fund to Another

Systematic Transfer Plan allows investors to invest a lump sum amount in a mutual fund and regularly transfer a fixed amount into another mutual fund. It helps investors by reducing risk exposure in volatile markets.

This option is opted for when one wants to invest a lump sum amount but wants to avoid the marketing-timing risk. The most common and sensical way of doing STP is to transfer money from a debt fund to an equity fund.

You can learn and understand more about STP here: What is STP in Mutual Funds?

Example: Suppose an investor has ₹10,00,000 and wants to invest the money in a mutual fund. Now in order to avoid the risk of timing the market, he wants to invest via SIP.

Now, he has a large sum in the bank and wants to invest a fixed sum of ₹20,000 monthly over a long period of say 50 months.

In this scenario, a large sum of money sits idle in the bank account for a very long period of time.

For instance, funds for the last 5 installments amounting to ₹1,00,000 shall remain idle in the bank account of the investor for almost 3 years.

In order to avoid this situation, an investor can opt for the Systematic Transfer Plan option.

This way, the entire sum of ₹10,00,000 can be invested in a debt fund to earn say 7-9% instead of the 2-4% normally earned as savings interest.

From this lump-sum investment in a debt fund, ₹20,000 would be transferred monthly to an equity fund of the same AMC in the form of a Systematic Investment Plan.

This ensures that the investor’s money is not idle in the bank (earnings from the investment in a debt fund) and simultaneously he is able to take the benefit of rupee cost averaging which arises from investing in equities via SIP.

2. STP Is Better Than Lump-Sum Investment

Investors should usually opt for investment via SIP. However, surplus or excess funds may be invested via the STP option.

In any case, investment via lump-sum is not a good idea.

It exposes the investor to the risk of market timing. The investment could be purchased at a time when the markets are high. Which means, if the market goes down, you could end up suffering short-term loss.

Factors favoring STP as a better investment option over lump-sum:

  • Market risk: Investment in lump-sum may lead to an investor investing his entire funds at the highest price in the market. This may lead to low returns and even losses in some cases. Investing via SIP or STP reduces risks and provides to its investors the benefit of rupee cost averaging.
  • Returns: Since investment via STP yields returns from both debt funds as well as from equity mutual funds, the returns are diversified and higher when compared to investing via SIP while keeping money in a savings bank account.
  • Flexibility: The STP can be made faster or slower upon the discretion of the investor. Therefore it can be adjusted and altered to match the valuations in the market i.e. according to the prices in the market being undervalued, overvalued or accurately priced.
  • Rupee cost averaging: Investment via STP (unlike lump-sum) allows an investor to purchase equity funds at different NAVs. This enables averaging out market highs and lows and therefore the risks of buying dear and getting stuck.

 

3. STP Happens Between Funds of the Same Mutual Fund Company

Investors must keep in mind that an STP always takes place between the funds of the same fund house. It is not possible to have an STP between the funds of two or more different mutual fund companies.

An investor who decides to exercise the STP option needs to decide the debt fund and the equity fund of the same AMC or Asset Management Company.

For example, if an investor wants to transfer money into an equity fund of say Reliance Small Cap Fund or Reliance Top 200 Fund, then he must first invest the lump-sum money into a debt fund of Reliance Mutual Fund (AMC) such as the Reliance Money Manager Fund.

In a way, the choice of the desired equity fund shall determine or have a role in the choice of the debt fund.

Firstly, the amount needs to be invested in a debt fund of the particular AMC and then transferred to the desired equity fund of that same mutual fund house.

It is advisable to choose debt and equity mutual funds from those fund houses which have a large number of schemes to choose from (both debt and equity schemes).

4. Keep an Eye on the Exit Load of Debt Fund

An investor must carefully select the debt funds where there is no exit load.

Exit load is a fee charged when you redeem your investments from a mutual fund before a certain period of time.

The exit load is calculated as a percentage of the amount being redeemed.

For example: Let’s say the amount being redeemed is ₹20,000 per month (as discussed in the case above). And the exit load is charged at 1%. So, the exit load payable by you is:

Total Exit Load=(Rate of exit load) X (Redeemed Amount)

or, Total Exit Load=(0.01) X (20,000) = ₹200

An investor must keep in mind this exit load shall be charged periodically (generally every month) each time the transfer takes place. This is because the STP shall transfer the funds from the debt fund to the selected equity fund on a regular/ periodic basis.

As regular and frequent redemptions are made from the debt fund, an exit load for the debt fund may severely impact the returns of the investor.

On the contrary, unless the investor is withdrawing the funds regularly, equity funds’ exit load will have a comparatively lesser impact on the overall cost and thereby returns of the investor. So the exit load of the equity fund you are investing in does not have much significance.

5. Choose Destination Fund According to Your Investment Goals

As mentioned earlier, the investment in the choice of the debt fund is guided by the choice of the equity fund.

Equity mutual fund should be selected on the basis of the investment objective of the investor.

The risk appetite and return expectation will have a major influence in deciding the type of equity mutual fund most suitable to meet the investor’s investment objective.

Equity mutual funds are of various kinds, each suited to serve a different purpose. Therefore, investors must exercise utmost care and planning while selecting the desired equity mutual fund for transferring investment from a debt fund.

Large-cap funds have lower growth potential and give investors lower returns on investment as compared to mid and small cap funds. But they provide good stability in returns on investment if invested for a longer duration.

Investment in a large-cap fund is best suited for investors with low-risk appetite and for an investment of lump-sum amount.

Mid-cap funds have better growth potential and give investors higher returns on investment as compared to large-cap funds

Investment in mid-cap companies is best suited for investors with moderate risk appetite and is most popular among investors.

Small-cap funds have exponential growth potential and give investors high returns on investment.

Investment in small cap is best suited for investors with high-risk appetite and have good knowledge of stock market.

Similarly, investors may also choose to invest in other popular types of equity mutual funds such as Balanced funds, Equity Linked Savings Scheme (ELSS) among others.

Balanced funds are funds that invest some proportion of their total corpus in equities and the remaining in debt securities. They provide a diversified portfolio of debt and equity and thus help in minimizing risk exposure of the investor.

6. Frequency and Amount of Transfers

It is up to the discretion of the investor to decide on the frequency and the amount of transfer from debt funds to equity mutual funds.

The frequency depends upon the investment horizon of the investor.

If you transfer money too rapidly from a debt fund to an equity fund, you do not get the benefits of rupee cost averaging. Since all your money will get invested in a relatively short period of time, chances are the market condition will remain largely similar. Thus, you run the risk of investing at a time when the markets might be very high.

On the other hand, you could also end up keeping the frequency too slow. In that case, your money could be lying in a debt fund earning lower returns for too long.

This is why it is very necessary to choose the right frequency for transferring money from a debt fund to an equity fund.

7. How to Start STP?

Deciding the target equity fund and debt fund, transferring between the two on a regular basis may seem to be a complex and complicated process in the first instance.

However, the entire process of investing via STP is very simple and easy to execute.

An investor needs to follow these steps:

  1. Get your investment account activated. Complete your onboarding at in/onboarding and upload necessary documents.
  2. Select equity funds or equity funds portfolio (destination funds) in which you want to invest for long-term
  3. Select and invest in debt funds or debt funds portfolio (source funds) in which you will invest the lump sum. Make sure these are from the same fund house
  4. Call/Email Groww support at 91088-00604 or support@groww.in with the details of the equity funds or portfolio.

Conclusion

STP is a great way to manage large funds available for investment.

It enables the use of Systematic Investment Plan to achieve the benefit of rupee cost averaging while making use of excess funds by investing in debt mutual funds (and not keeping the funds idle).

While debt funds give reasonable returns (greater than usual FD and savings returns), equity gives higher returns while diversifying the risk of the investor.

Happy Investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.