1 min read.Updated: 28 Jul 2020, 02:55 PM ISTAvneet Kaur
STP helps in deploying funds at regular intervals
Money invested in debt fund generally yields returns till the time it is transferred to equity fund
An STP or Systematic Transfer Plan is a plan where investors allow a mutual fund to periodically switch or redeem a certain amount or certain units from one scheme and invest in another scheme of the same mutual fund house. Thus at regular intervals an amount or number of units you choose is transferred from one mutual fund scheme to another of your choice. This facility thus helps in deploying funds at regular intervals.
STP has some integral features of Systematic Investment Plan (SIP). One of the differences between STP and SIP is the source of investment. In case of the former, money is transferred usually from a debt fund and in case of latter; it is the investor's bank account. Since it is similar to SIP, STP also helps in Rupee Cost Averaging.
Money invested in debt fund generally yields returns till the time it is transferred to equity fund. The returns in debt funds are usually higher than savings bank account and aims to assure relatively better performance.
STP can also help in rebalancing the portfolio by allotting investments from debt to equity or vice versa.
How does STP work?
If you are investing ₹10 lakh in an equity fund through an STP, first you will have to select a debt fund which allows STP to invest in that particular equity fund. Once you select, invest the whole amount i.e. is ₹12 lakh in the debt fund. Then, you will have the option of transferring the money from debt fund to equity fund of the same fund house along with choosing the suitable frequency.