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What is the Significance of STP in Mutual Fund?
Mutual Funds
by 5paisa Research Team 27/10/2021

Investing in exchange-traded funds (ETFs) and mutual funds using the Systematic Investment Plan (SIP) is a common method to comprehend a systematic transfer plan (STP) (SIP).

The use of systematic investment plans (SIPs) gives investors the discipline of investing a certain amount each month. SIPs are arguably the greatest method to deal with investment volatility because of rupee cost averaging and other advantages.

Investment returns on mutual funds may be projected with the use of a SIP calculator. A SIP Calculator can estimate the return on mutual funds and exchange-traded funds or ETFs. Instead, STP is a variation of SIP that enables clients to progressively move assets from one asset management firm to another.

 

It is difficult to set up a SIP if an individual just has a flat sum to invest. If anything, investors are stuck with putting their money in a mutual fund or an ETF and hoping for the best, which they won't get.

Furthermore, investing a large amount of money all at once in equities and debt funds may be very hazardous. Investors may move a predetermined amount routinely from one fund to another via an STP, which is provided by asset management firms.

This post discusses the intricacies of STP in mutual funds followed by its significance for investors.

What is a Systematic Transfer Plan?

STP is a feature that allows unitholders to transfer a selection of predetermined units from one scheme to another on a regular basis. Through seamless asset class switching, the STP service aids investors in rebalancing their investment portfolios.

The usage of these instruments may assist to minimize volatility and achieve financial objectives. Let's say an investor gets a one-time windfall from the sale of a piece of real estate.

Investing in a low-risk money market or liquid fund and then methodically transferring a set amount into an equity fund allows the investor to benefit from rupee cost averaging while generating somewhat better returns than bank deposits.

This is an option for investors. Regular transfers of funds into an equities fund allow investors to relax about the market's fluctuations. You may plan to deposit INR 25,000 a month into an equity fund so that over the following 20 months.

The investor takes advantage of the volatility and manages to decrease the cost of purchase, for example, in case the client earns INR 5,00,000 in a lump sum and invests that in a liquid fund.

They are ideal for investors who want to put a large amount of money to work in equities funds but are concerned about trying to time the market.

 

How does STP Benefit Investors?

1. An Opportunity to Earn Better Returns

STP usually results in more profits. It's because, with an STP, you'll put the lump amount into a debt fund instead of a liquid one. The return on liquid funds may vary from 7 to 9 per cent, which is much greater than the return on a savings account, which is just 4 per cent.

2. Getting Consistent Profit Returns

STP's returns are quite dependable. As long as money is sitting in your source fund (debt fund), you'll continue to accrue interest until you move all of it.

3. Taking Charge of Your Risks

Moving to a less hazardous asset class may be accomplished with the use of an STP. Let's suppose you started a 30-year SIP into an equities fund as part of your retirement savings strategy.

As you get closer to retirement, consider implementing a systematic withdrawal plan (STP) to protect your fund's value.

You tell the fund house to move a certain amount of money from an equity fund to a debt fund upon your instruction. By the time you retire, you'll have all of your money in a secure place.

4. Averaging of the Rupee Cost

Systematic Transfer Plans (STPs) purchase fewer units at higher NAV and more units at a lower price to average out investment costs. Every time your money is moved from one fund to another, the management of that fund buys more units.

As a result, you will benefit from rupee cost averaging, which lowers your investment's per-unit cost over time.

5. Re-establishing Portfolio Equilibrium

Your investment portfolio should include a healthy mix of debt and equity. Investments are moved from debt to equity funds or vice versa using an STP to rebalance the portfolio and achieve greater returns.

STP vs SIP: What Should you Choose?

Investing in a specific fund using STP is similar to setting up a systematic investment plan (SIP). However, if you have a large amount of money to invest, STP is the way to go.

This is due to the fact that under a systematic investment plan (SIP), your money would sit in your bank account, earning no income or earning just a meagre amount of interest, compared to a low-risk liquid fund or an ultra-short-term debt fund.

As a result, it's preferable to put the whole amount into a low-risk debt fund before scheduling an STP to one of your preferred equity funds.

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