A Systematic Transfer Plan is a strategy that allows investors to transfers fixed amount of money from one scheme to another without any hassles. It usually follows the shift of funds from debt fund to equity funds. There are certain times when market fluctuations are high or the equity are trading at attractive valuation therein the STP enables the investors to shift from their debt funds to selected equity funds to attain the benefit of cost averaging. It also minimizes the damages because the funds are transferred at regular intervals in which the entire amount is not exposed during volatile scenarios. It is worth noting that the STP can only be operated within single AMC via inter shifting between multiple schemes offered by that given AMC.
Benefits of Systematic Transfer Plan (STP) are:
• It allows in balancing the investments and aim to create portfolio mixture of both debt and equity which provide optimal combination of risk and returns.
• STP also helps in averaging of cost by following a technique of investing wherein the investment average cost will be low at times when equity markets are undervalued and selling them at times when it is overvalued at higher values.
• Through STP, an investor can gain market advantage thereby can earn higher returns.
How does the STP work?
Suppose you have Rs. 12 Lakhs in liquid fund which are providing limited returns but you want to generate high returns by investing in the stock market. Hence, you first select an equity fund of the same AMC and later starts monthly frequency STP of Rs. 1 Lakh that transfer funds into equity scheme periodically over a period of 1 year.
To conclude, the STP is great tool which depends upon efficient utilization and understanding of phases of market cycles.