What is STP (Systematic Transfer Plan)? When should I use STP?

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

Before understanding STP, let us discuss SIP (Systematic Investment Plan). SIP is a disciplined way of investing a regular amount every month (or quarter) into the type of fund you have selected.  For example, if you have selected a fund and opted for a SIP of Rs.1000. This amount will be deducted every month and invested in that selected mutual fund.  On the other hand, STP is another variant of SIP.

In STP, lump sum amount is invested in debt funds and from there it is regularly transferred to the other funds. This transfer is called systematic investment plan. The regular investment period can be three months or quarter or years. It reduces risk exposure over a period of time.

STP is a strategy which minimizes risk and can protect investors from adverse losses.  Although all risk mitigation strategies also reduces the returns when market follow an upward trend in comparison to other funds. Considering all the risk and return factors, STP is the best way of investing the lump sum in the unpredictable markets.

Top performing debt funds for STP:

STP is a good way to start investing if you have a large amount to invest in equities but are not comfortable investing because of market risk.

Equity markets can be very volatile and lumpsum investments can suffer huge losses if markets go down. SIP (Systematic investment plan) helps you ride the volatility. However, what if you have large amount to invest now. STP comes into picture.

Through STP, you invest lumpsum in one fund (usually debt fund) and then transfer systematically to a another fund (usually an equity fund) at regular intervals (usually monthly).

You can check out some examples of STP here - 6 Best Mutual Funds for STP

An example: 

You have Rs 1Lac with you that you need to invest in equities. However, markets are very volatile and you also think that they are overvalued. This is what you do (this is just an example): 

You invest Rs 1Lac in Franklin India Low Duration Fund (an ultra short term debt fund). And do STP to Franklin India High Growth Companies Fund (a multi cap equity fund). You invest Rs 10,000 every month. So your 1L will be invested in equity over 10 months. But while your money is transferred in equity funds, you are getting your capital appreciation in debt funds. 

So at the end of 5 months:

Money in Equity = 50K + returns on the equity investments done so far 

Money in Debt = 50K + returns on the debt investments done so far (accounting for withdrawals)