1. What is a Systematic Transfer Plan (STP)?
Under STP , you invest a lump sum amount in one scheme and regular ly transfer a pre-defined amount into another scheme, on a specified date. The mutual fund will reduce the number of units equal to the amount you have specified from the scheme you intend to transfer money .
At the same time, the amount that is trans ferred will be utilised to buy the units of the scheme you intend to transfer money into, at the applicable net asset value (NAV). You can get into a weekly , monthly or a quarterly transfer plan, as per your needs.
2. How does an STP work for you?
STP is a useful tool to take expo sure into equi ties in a staggered man ner or to reduce expo sure over a period of time. Say you have Rs1 lakh to invest in equity over a period of time.
You could put this amount in the liquid fund of a mutual fund.
This gives an opportuni ty to earn higher than you would in your sav ings bank account. Once the money is there in the liquid fund, you can start an STP where every month a pre-determined amount will be invested into an equity fund. This helps in deploying funds at regular intervals in equities with minimum timing risk.
3. When is it effective?
An STP from debt to equity will work when markets are volatile and an investor does not want to take risk in a short span of time. If you invest through STP in equities and if markets fall or are volatile, then this situation will be better than the onetime investment option.
4. When will it not work?
In a scenario where equity markets are at the end of a bear market and markets can get into an upmove anytime, in that case, one-time investment is a good choice and an STP may lose out.However, it is very difficult to predict this. Given that a retail investor does not have the time and tools to research the markets on his own, it makes sense for them to stagger their investment over a period of time and get better risk adjusted return.
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