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Hi, please explain what is the concept of STP? What are its benefits? When should I use it?

-Gopi

The full form of STP is Systematic Transfer Plan. This is a very useful concept started by the mutual fund industry to help investors avoid the volatility of equity markets.

If you have to invest a small amount every month in the equity market through mutual fund schemes, you may opt for SIP which is very popular among retail investors. SIP stands for Systematic Investment Plan. However, if you have a lumpsum amount to invest in the equity market, say 5 lakh, 10 lakh, or even higher, it is advised that instead of directly investing in equity mutual fund schemes, you should stagger your investment in debt/liquid funds and transfer from there certain amounts to equity mutual fund schemes of your choice by using the tool of STP.

For example, if you have received a bonus of Rs. 10 lakhs from your company and you are planning to invest it in equity mutual funds for long-term goals like your children’s marriage, children’s education or self-retirement etc., instead of investing the entire amount of 10 lakhs into equity mutual fund schemes directly, you may invest the same in some debt fund or liquid fund and give instructions to transfer Rs. 1 lakh every month to four different equity mutual fund schemes of your choice dividing Rs. 25,000 in each of the schemes.

In other words, you have started four mutual fund SIPs of Rs. 25,000 each for the next 10 months. This way, you will be able to override the volatility in the equity markets and you will not be impacted by the ups and downs of the stock market.

However, please note that in STP you should be prepared to pay a small amount as income tax on your short-term capital gains which will accrue every time the amount is transferred from debt fund to equity fund.

The query is answered by Rajiv Bajaj, Chairman & MD, Bajaj Capital Ltd.

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Updated: 24 Sep 2022, 02:50 PM IST
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