If you’re planning to invest in a mutual fund shortly, getting to know the various concepts associated with it is very important. This will help you make a more informed and accurate investment decision that’s in line with your financial goals. One of the many mutual fund concepts that you need to be aware of is STP. Wondering what STP in mutual funds is? Here’s everything you need to know about this unique feature.
What is STP in Mutual Funds?
STP is an acronym for Systematic Transfer Plan and is a feature that’s offered by many mutual fund houses. Opting for STP allows an investor to transfer a specific amount of money from one mutual fund to another. The transfer of funds from the source mutual fund to the target mutual fund can either be done through a swift single transaction or slowly over a specified period.
That said, this feature is only available to investors wanting to shift between mutual funds offered by the same fund house. Likewise, a Systematic Transfer Plan is not available for investors wanting to move between mutual funds operated by different fund houses.
How Does STP in Mutual Funds Work?
Now that you’re aware of the meaning of STP in mutual funds, let’s take a look at how it works. To help you understand the concept better, we’ve come up with an example.
Let’s say that you invested about Rs. 50,000 in an equity mutual fund when you were younger. After about 10 years, you find that your risk tolerance has lowered significantly and that you value the steady and more consistent returns offered by debt instruments more than the wealth-creation capacity of equities. Meanwhile, the value of your investment has also gone up to about Rs. 1,20,000.
Since your priorities and financial goals have all changed, you conclude that moving your investment from equity to debt is the right way to go. And to achieve this transfer, you choose to go the Systematic Transfer Plan route, where you opt to transfer around Rs. 10,000 each month from the equity fund that you’re currently invested into a debt mutual fund of your choice from the same fund house.
At the end of 12 months, the entire investment value of your equity mutual fund would have been seamlessly transferred over to the debt fund of your choice, including any new gains that your existing portfolio might have generated all along. You can use a mutual fund return calculator to estimate potential gains and assess the impact of such a transfer on your overall investment strategy.
What are the Benefits of STP?
There are plenty of reasons why you should opt for a Systematic Transfer Plan to switch between two mutual funds. Here’s a quick overview of a few of them.
1. Helps you Rebalance the Portfolio
Portfolio rebalancing is an important activity that every investor needs to do periodically. This allows you to ensure that you meet your financial goals and objectives. By opting for STP in mutual funds, you can accomplish portfolio rebalancing effortlessly and in a hassle-free manner.
2. Lowers Overall Cost of Investment
If you opt for a Systematic Transfer Plan where you slowly transfer a fixed sum of money from the source mutual fund to the target mutual fund over a certain period, rupee cost averaging kicks in, reducing the overall cost of your investment.
3. Helps Maximize Returns
The equity market moves cyclically with periods of bullish and bearish activities. During bullish periods, you can switch from debt funds to equity funds using the STP in mutual funds option. On the contrary, during bearish periods, you can switch from equity funds to debt funds. This allows you to leverage market swings to your advantage and help you maximize returns.
4. Brings About Stability
Continuing with the previous point, the STP feature can be used to stay protected from market downsides. For instance, if the market is going through a tumultuous phase, you can use the Systematic Transfer Plan to switch to debt funds temporarily till the bearish phase passes. Once it does, you can choose to switch back to equity funds. Doing so brings about some stability to your portfolio.
Conclusion
With this, you must now be thoroughly aware of the concept of STP in mutual funds. Now, if you’re planning on using this feature, you should know that STP is viewed as a redemption and therefore attracts capital gains tax. So, this is something that you would need to account for when using a Systematic Transfer Plan.
On the other hand, if you’re someone who hasn’t yet started to invest in the stock market, but would like to do so in the future, make sure to first open a Demat account before you proceed. Motilal Oswal offers a free trading and Demat account, which you can apply for online from the comfort of your own home. So, go ahead and get yourself a trading and Demat account and start your wealth creation journey by investing in stocks, mutual funds, upcoming IPOs, and other market-related instruments.