What is a Systematic Transfer Plan? Process, Types, Benefits, Warnings & More

What is your plan for a secure future? If still in dilemma, then go for STP. STP stands for Systematic Transfer Plan (STP). It is a finance management strategy that enables investors to transfer a fixed amount of money from a Source scheme to a Target scheme, also termed debt fund and equity fund.

What is the process of a Systematic Transfer Plan?

STP is a useful tool in mutual funds to gain average investment within a specific period. But who should invest money in STP? The three deciding factors for SIP are an investor’s current allocation to equities, the risk profile of the investor, and the market view. 

To understand the process of STP is disciplined and steady. For example, if you have to invest Rs.2 lakh in an equity fund using STP, you should first select the span, like an ultra short-term fund or a liquid fund. Then comes the duration of the installment, like how you want to make transfers daily, weekly, monthly, or quarterly. So, if you select an installment of Rs.20,000 every three months, it will take 30 months to complete the investment. 

What are the types of STP?

The various types of Systematic Transfer Plans are:

Flexible STP

Under this plan, the funds are transferred according to the need of the investors. 

Fixed STP

In the case of a fixed systematic transfer plan, the total amount transferred from one Mutual Fund to another remains fixed.

Capital Systematic Transfer Plans

When somebody picks capital systematic transfer plans, all the total gains made from the market are turned to another scheme with a high potential for growth.

Benefits of Systematic Transfer Plans

Minimum Investment

There is no standard minimum investment amount to invest in the source fund which gives you the freedom to invest according to your choice.

Scope for Higher Returns

Unlike SIP, Liquid funds are known to yield higher returns in the range of 7%-9% as compared to savings bank accounts or other plans.

Earning Steady Returns

The returns made via STP are reliable because the amount in the source fund keeps on generating interest until the complete amount is transferred.

Managing Risks

STP in comparison to other plans is less risky and gives higher returns too.

Rupee Cost Averaging

Systematic Transfer Plans average out the cost of investment by buying lesser units at a higher NAV and more units at a lower price. 

Re-balancing Portfolio

STP helps to re-balance the portfolio by moving investments from debt to equity funds or the opposite.

Precautionary measures for STP 

• Always move ahead with proper research and knowledge of market assets and fluctuation mechanisms.
• Exit load and tax deduction should be calculated in advance for systematic transfer plans. And the risk should never be eliminated.
• Always pick STP only if you have a big amount not required immediately.
• STP requires discipline, which means all the moves should be pre-planned as any sudden action will abstain you from the benefits.

As per experts, STP is a smart way to earn high returns with your investment over a specific term with less risk. As STP installments are transferred from one mutual fund to another whereas other plans or specifically SIP involves the transfer of money from a saving bank account to a mutual fund plan.