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Business News/ Money / Personal Finance/  What is STP and how does it work? An explainer
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What is STP and how does it work? An explainer

Systematic transfer plan enables investors to shift a part of the portfolio from one mutual fund scheme to another. The transfer happens automatically, offering a high degree of convenience to investors

One of the key reasons to opt for STP is to be able to buy fund units at different price levels to leverage the benefits of rupee cost averagingPremium
One of the key reasons to opt for STP is to be able to buy fund units at different price levels to leverage the benefits of rupee cost averaging

Retail investors exercise a lot of caution before deciding to invest in a mutual fund scheme. After investing, fluctuation in market prices could compel them to exit the scheme and explore an alternative plan offered by the same fund house.

This arrangement is known as systematic transfer plan (STP) wherein investors have the option to transfer some of the funds in their portfolio from one plan to another.

The funds can be transferred from one fund scheme to another offered by the same fund house, but carrying out such transfer between different asset management companies (AMCs) is not allowed.

Usually, most of the mutual fund houses mandate a minimum of Rs 12,000 to be transferred between the schemes to enable investors to opt for STP.

Reason to opt for STP

Rupee cost averaging: One of the key reasons to opt for STP is to be able to buy fund units at different price levels to leverage the benefits of rupee cost averaging. This way, investors can spare themselves from investing at the peak price levels during a bull run. And when investment takes place in a staggered way, investors can avoid this from happening.

Convenient to investors: Since the transfer of funds happens automatically, investors find this convenient to transfer funds between different schemes.

Advantages of choosing STP

Higher returns: During a bull market, investors can shift some of the funds from debt or fixed income schemes to equity schemes or index funds to increase the scope of their earnings.

Volatile markets: During a volatile market, investors can shift some of their funds from equity to debt instruments to choose safety over earnings.

Precautions to take

Although opting for an STP is advisable when an investor wants to leave one policy for another, investors must be careful about the tax liability it arises and the exit load it incurs.

It is vital to note that transferring funds from one scheme to another is seen as a redemption of units in one scheme and a fresh purchase of units in another scheme.

So, those opting for STP to earn extra income should be mindful of the fact that they would have to incur some cost in form of income tax and exit loan. One must factor in these costs before opting for the transfer plan.

 

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Published: 21 Jul 2023, 08:40 AM IST
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