The Importance Of STP And How It’s Different From SIP

How often have you heard people talking about the benefits of starting and maintaining a Systematic Investment Plan (SIP)? I would say, fairly often. It is well-known that an SIP is the best way for you to start investing in the market in a gradual manner while also accumulating the immense benefits offered by rupee cost averaging and compounding interest. While we all know that SIP is a great way to instil financial discipline, have you heard of the term STP or Systematic Transfer Plan? If not, then you are at the right place!

What is an STP?

A systematic transfer plan is the best strategy for today's volatile market. As the name suggests, an STP allows you to transfer your invested amount, in a disciplined and lucrative manner, from one mutual fund scheme to another. In most cases wherein the STP facility is utilised, the fund transfer is initiated from a debt fund to an equity fund. Therefore, an STP also enables you to attain the benefits offered by both debt and equity schemes.  

Difference between STP and SIP

The biggest and simplest difference between STP and SIP is that, while both the investment routes usually involve regular investment in a desired fund; in STP, typically, the money is transferred from your debt fund to the target equity fund. On the other hand, if you have a SIP, then the investment amount is deducted from your bank account. Another important distinction between the two involves the fact that STPs offer you better returns that SIPs because, through this mode, you get to benefit from the returns offered by both, your debt scheme, as well as the scheme into which the money is being transferred.

The importance of STP

Investing via the systematic transfer plan can help you benefit from the concept of rupee cost averaging, where the STP averages out the cost of investment by buying lesser units at a higher Net Asset Value (NAV) and more units at a lower price or NAV. For example, if the NAV of your target fund is Rs. 12 in the first month, Rs. 10 in the second month, and Rs. 8 in the third month, the STP will get you an average price of Rs 10. On the other hand, if you decided to invest all your money lumpsum in the first month then your cost of acquisition would be Rs. 12.

Another important benefit of STP is that you enjoy the scope of higher returns because here you will initially be investing the lump sum in a debt fund, like a liquid fund. Liquid funds usually yield higher returns of around 6%-7%, as compared to the meagre 4% returns earned in a bank savings account. Further, when your money gets transferred to an equity fund, you will continue to earn high returns, in line with that of the market. 

People also utilise the STP option to rebalance their portfolios. Suppose you have made hefty investments in debt funds in a particular year and, towards the end of the year, when you rebalance your portfolio, you decide to allocate some of these funds to the equity segment. Instead of exiting from the debt fund and beginning a new equity fund investment via the lump-sum mode, you can simply opt for STPs and have your funds transferred in a disciplined manner, thus enjoying the cumulative benefits of compounding and rupee cost averaging, in addition to optimally rebalancing your portfolio.

Some people also leverage the STP option when they want to transfer their corpus from a riskier asset class to a comparatively safer one. For instance, if you began an equity investment with the aim of building your nest egg, as you near your retirement period, you can harness the STP route and have your corpus transferred from the riskier equity fund to a comparatively stable debt fund, in a calibrated manner.

In conclusion, an STP is an excellent option for individuals who are keen on shifting their investments into a different scheme, especially when they do not want to process it all at once. You should only opt for STPs if you have a lump-sum already invested, and are sure that you will not require it in the near future. STPs are also beneficial for risk-averse investors who do not want to make lump-sum transfers but would prefer to do it in small and measured steps. 

(Author- Robin Malhotra,Mutual Fund Distributor)