As the name suggest, systematic transfer plan (STP) is the process where you can automatically transfer from one mutual fund plan to another one. In cases where the money is already invested in units of mutual funds, the process to switch from one fund to another happens through STP.
“Typically, STPs are advised for deploying lump sum investments in the market. A person can invest an amount in liquid or ultra-short funds and transfer a periodic amount to an equity fund in the same fund house," said Srikanth Meenakshi, founder and chief operating officer, Fundsindia.com
Is it useful?
According to experts, it helps in reducing market timing risk. “STP reduces market timing risk and also enables the investor to earn more from their source corpus through their debt fund investment. However,an STP can also be effectively used for transferring out of equity to book profits or change asset allocation (especially in situations where goal time is nearing). In such situations, transferring from equity fund to liquid fund has the same benefit as STP into an equity fund avoiding market timing risk. This can be used to affect a more beneficial systematic withdrawal plan," said Meenakshi.
How should you use it?
If you are not sure how to use STP effectively, you should seek help from a financial planner. “STP serves to average out the cost of investment when you have a lump sum to invest in equity fund. For instance, If you have Rs. 10 lakh to invest in equity fund, invest it in the liquid fund and register for monthly STP of Rs. 1 lakh to equity funds. This way, the amount will be invested in equity in 10 months, averaging the cost. The amount and duration can be decided based on the market situation. A planner can help if you are not sure how to do it," said Melvin Joseph, founder of Mumbai based Finvin Financial Planners.