Systematic transfer plan: know when STP is a better investment strategy


STP is suitable for investors who have a lump sum on hand and want to profit from average costs and volatility.

Systematic investment plan, commonly referred to as SIP, is a popular investment strategy among investors. As part of this strategy, investors take a disciplined investment approach where they can invest a regular amount each month as a long term investment in exchange traded funds and mutual funds.

In fact, SIPs are the best way to deal with investment volatility due to the advantage of average rupee costs. However, let’s discuss another strategy known as a systematic transfer plan or STP that will help you reach your financial goal in the desired target of mutual fund investing.

Mechanics and advantages
Certainly, STP is a variant of SIP which offers investors the possibility of transferring a fixed sum at regular intervals from one scheme to another with the same management company. This facility helps investors rebalance their investment portfolio by switching seamlessly between different asset classes, which will reduce volatility and help achieve desired financial goals.

Consider an investor who earns a lump sum of Rs 20.00,000 from the sale of a property. He could invest the entire amount in a money market or liquid fund and then mandate the fund house to transfer 1,000,000 rupees each month into a mutual fund in shares over a period of 20 months. This will help combat volatility and lower the cost of acquisition.

This strategy helps investors by spreading their lump sum investment over a period of time so that they do not get stuck in a fund at its maximum net asset value (NAV). The same STP process could be followed the other way around, from an equity fund to a debt fund while exiting an equity plan in retirement or achieving desired financial goals.

Types of STP
There are different types of STP that one can follow. For example, under fixed STP, investors transfer a fixed amount from one investment fund and transfer it to another fund. In STP Capital Appreciation, investors withdraw the profit they have made on an investment and invest in another investment fund. In Flexi STP, investors could choose to transfer a variable amount. The fixed amount would be the minimum amount and the variable amount depends on the volatility of the market.

As stated above, STP indeed works as a SIP mechanism in which a fixed amount is invested in a particular fund. However, if you have a lump sum to invest, it is best to invest it through STP. So, it would be better to invest the lump sum in a low risk debt fund and then schedule an STP on investment funds of your choice. However, investors should check the exit fees imposed by mutual fund companies if money is withdrawn before certain specified intervals, typically one year for equity funds. However, there is no exit charge on liquid funds and most STPs transfer money from a liquid fund to an equity fund without any exit charge.

To conclude, STP and SIP are two different investment strategies with associated advantages and limitations. STP is suitable for investors who have a lump sum on hand and want to profit from average costs and volatility.

The writer is professor of finance and accounting, IIM Tiruchirappalli

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