Topic 4: Guide to systematic transfer plan
What is it?
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.
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.
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.
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.
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.
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.