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Systematic Transfer Plan (STP): Types, Features & Benefits

There is no doubt about the fact that investing in mutual funds is easier today than it has ever been before. The evolution of mutual funds in India, aided by the digital boom and the onset of the ‘smart investor’, has been significant in the past five years.


One of the most popular developments in mutual fund investing has been the introduction of Systematic Investment Plans, more commonly known as SIPs – and we have covered a lot of ground in telling you everything you need to know about SIPs! But today, we’ll be focusing on STPs.


Let’s start with two important questions – what is a Systematic Transfer Plan and how does it work?

What is a Systematic Transfer Plan (STP)?


Systematic Transfer Plans (STPs) are a popular investment strategy in India that allow you to efficiently manage your funds by systematically transferring (duh!) money from one mutual fund scheme to another.


How does it work? This transfer of your funds takes place periodically, enabling you to reallocate your funds to a scheme that offers higher returns. You can think of STPs as a safeguard against market fluctuations; your money can be redirected when the price of one fund falls, toward another fund that offers a better interest rate.


Types of Systematic Transfer Plans


There are various types of Systematic Transfer Plans that any smart investor needs to know about –


  1. Fixed STP – In this type of Systematic Transfer Plan, you – the investor – gets to decide a fixed amount that will periodically be transferred from one mutual fund to another.


  1. Flexible STP – Under this Systematic Transfer Plan, you decide how much money you want to move between funds, as and when you want to – depending on various market considerations and your investment objectives.


  1. Capital STP – This one is interesting! Under this type of Systematic Transfer Plan, your capital gains from one fund get allocated to another fund, typically one with a higher earning potential.


Your selection of a Systematic Transfer Plan that best fits your goals needs to align with your risk tolerance, investment horizon, and favorable market conditions, for you to get powerful gains using STP schemes.


Features of Systematic Transfer Plans


There are certain features of Systematic Transfer Plans that make them a lucrative and appealing option, especially for young investors who are looking to play around with their money but are not yet financially literate enough to make big moves. STPs offer a gateway to diversification, albeit only with respect to mutual fund investing. Here are key features of Systematic Transfer Plans that we think you’ll be happy to know –


  1. Diverse Systematic Transfer Plans are most commonly used by investors to transfer money from a debt fund to an equity fund. By gradually moving investments from a low-risk debt fund to a potentially higher-yielding equity fund, you can diversify your portfolio while still limiting your risk exposure.


  1. Systematic – It’s in the name, guys! Systematic Transfer Plans are characterized by periodic (read: routine) transfers, typically doled out in a monthly or quarterly structure. This methodical approach helps investors, especially first-time investors, avoid market timing issues and impulsive decision-making, which – spoiler alert! – are common pitfalls for inexperienced investors.


  1. Flexible – Flexible STPs give you complete control over the reallocation of your funds. You decide how much money you want to redirect, when you want to redirect it, and how often you want to redirect it. This makes it easier to leverage the full potential of this setup while aligning your gains with your goals.


  1. Affordable Systematic Transfer Plans for mutual funds typically don’t have many restrictions on the minimum investment amount (so, no excuse to not invest!), posing a relatively low barrier to entry. However, most asset management companies recommend investing at least ₹12,000 lump sum into an STP. (PS – Investing in an STP can itself be a pretty cool personal financial goal!)


  1. Automated – We get it. It is not easy to find time every day and make routine payments toward investments. Forget about adding specific dates to remember in the mix! Systematic Transfer Plans, thankfully, can be completely automated. Your money will automatically get invested in your target fund, ensuring that no money is staying uninvested, and is constantly earning you returns.


You can really elevate your financial portfolio by using STPs strategically and using their features to maximize your earning potential.


Bonus: Systematic Withdrawal Plan


Before we delve into the benefits of a Systematic Transfer Plan, we thought we’d just touch upon Systematic Withdrawal Plans as well – the two are indeed two separate mutual fund investment plans.


A Systematic Withdrawal Plan is an investment scheme wherein you can arrange for a periodic withdrawal from your SIPs. The amount you want to withdraw, and the frequency at which you want to withdraw are both up to you. An SWP feature is beneficial to people who are seeking an active income stream from their investments, or those who wish to sell at periodic times to maximize their gains.


Pro Tip – Just withdraw your gains every now and then, instead of regularly dipping into your capital investment!


Pro Pro Tip – If you’re a young investor, it’s still recommended that you just stay invested!


Benefits of Systematic Transfer Plan for Investors


Let’s get back to it after that brief interlude! Young investors need to keep an eye out for investment opportunities that are lucrative and still have earning potential. Here are the main benefits of STPs that make them a viable investment option for you –

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