Being an intelligent investor is very much similar to being a good gamer. When you play a long fighting or shooting game, you need different weapons in your armoury that you can yield at the right time.
Similarly, when you are a long-term investor, you need different sorts of tools which you can use at the right time.
Undoubtedly, SIP is a great tool when you’ve to invest small monthly amounts, but is it enough? Well, you should have another weapon in your investment armoury: Systematic Transfer Plan aka STP. Here’s a manual on how to use this weapon like a PRO.
How does an STP work?
In a Systematic Investment Plan (SIP), money is transferred from your bank account to a mutual fund.
But, a Systematic Transfer Plan (STP) is a way of transferring funds from one mutual fund scheme to another.
Here’s how it operates:
Suppose an investor has ₹5 lakh saved and wants to do lump sum investing.
However, they are not sure about it since the market is in a volatile state. Hence, they invest the entire sum in a debt fund, which is much safer and gives decent returns.
But, they know that debt funds won’t grow their money at a great rate. So, they set up an STP for their preferred equity funds.
Now, this ₹5 lakh will be transferred from their debt fund to the chosen equity funds at regular intervals.
However, it’s important to note that STP is only possible among mutual fund schemes from the same fund house.
For instance, you can transfer funds from a Nippon Debt Fund to a Nippon Equity Fund but not from a Nippon Debt Fund to a Quant Equity Fund.
Why to do an STP?
STP (Systematic Transfer Plan) helps reduce the risk of investing at the wrong time in the stock market.
If you put a lump sum amount into an equity fund and the market is experiencing heavy volatility, you could lose a lot.
But with instruments like STP and SIPs, you get rupee-cost averaging which means you can buy more mutual fund units when the market is down and fewer units when it goes up.
This averages out your risk.
Similarly, when the market is bullish, investors can shift their money from a debt fund to an equity fund to generate more gains.
Moreover, in an STP, you get higher returns from a debt fund than you’d get had you parked it in a normal savings bank account.
Sweet, right?
Also Read: SIP vs Mutual Fund Lump Sum Investment: Know the difference
Should you do an STP?
See, it’s very simple. If you believe in your analysis and feel you can time the market well, you can go ahead with the lumpsum investment.
However, most of us might not be that confident and don’t even have the time to do all this analysis.
Hence, STPs work great for a low-to-medium-risk investor, especially during a volatile market.
But, please remember that fund transfer in STP is seen as a redemption of units, hence taxation and exit load might be applicable.
Therefore, go for an STP only when you have a sizeable corpus to invest, else sticking to SIPs might be a better option.
Disclaimer: Investing in mutual funds is a personal choice. Kindly make sure to look at other parameters before investing. The 1% Club News team recommends consulting a SEBI-registered investment advisor.
