In Systematic Transfer Plan, a fund house allows investors to invest a lump sum amount in one mutual fund scheme and transfer regularly a pre-defined amount into another scheme. STP is of three types: Fixed, Flexi and Capital Appreciation. A fixed STP is where investors take out a fixed sum from one investment to another. A capital appreciation STP is where investors take the profit part out of one investment and invest in the other. In Flexi STP, the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.
The investor needs to select a fund from which the transfer should take place and a fund to which the transfer is taking place. Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen and the options available with the AMC. If an investor chooses to transfer from a liquid fund to an equity fund, the lump sum is invested in a liquid or a floating short-term plan and is transferred at regular intervals to a specified equity fund.
- Consistent return – Returns in STP are pretty consistent as money invested in debt fund earns interest till the time it is transferred to equity fund.
- Averaging of cost – STP has some integral features of Systematic Investment Plan (SIP). Similar to SIP every month an amount is invested in an equity fund, so benefit rupee cost averaging.
- Rebalancing portfolio – An investor’s portfolio will be balanced between equity and debt.
- Power of Compounding – Like SIP, Systematic Transfer Plans too facilitate power of compounding.