What is STP in Mutual Fund? How does it Work?

There is something new coming up every day in the financial market. There are new innovations in terms of financial services and they are making things easier for investors. There are new things in the mutual fund market as well. Traditionally, there had been only one kind of SIP but now there are different types of SIP as well. For example, you will now notice a new kind of SIP which is known as Step-up SIP. In this, you can increase your contribution automatically after a specific period of time.

Similarly, there is another thing that is available for investors and this is called STP. STP stands for Systematic Transfer Plan.

Do you know what STP is all about? You don’t? Well, don’t worry as we have listed all the information about STP in this article so that you can also avail the benefits of STP while investing in Mutual Funds.

What is STP?

As mentioned earlier, STP Stands for Systematic Transfer Plan. Now, as the name suggests, in the Systematic Transfer Plan, you can transfer your funds from one mutual fund to another in a very systematic manner. Let us explain this with an example.

STP in Mutual Fund

For example, you sold a property and you received Rs 20 Lakh from the sale of the property. Now, you want to invest this money but it would be not a good idea to invest Rs 20 Lakh in an equity or balance fund at once. You will be undertaking a huge market risk if you do that. So what do you do to invest this money?

The smart choice here would be to invest this Rs 20 Lakh in a Debt Fund. This way, you will not loose on to the opportunity cost associated with money as you will be earning the interest on the fund. Now, you can set up an STP here and transfer the funds to equity-based mutual funds slowly and steadily.

To understand it better, you can say that STP is basically a SIP but the difference is that the money is transferred from one mutual fund to another instead of money being invested directly from your bank account.

There are certain advantages of STP and below are some of those.

Advantages of STP

One of the greatest advantages of STP is the fact that it reduces the market risk for you. If we talk about the example listed above, then you would notice that investing all the money in the equity-based fund at once would induce risk. Whereas, if you invest a certain amount every month then you can easily eliminate the risk.

You can also do it other way around. To make it easy for yourself, you can invest the complete amount in Debt Based fund and slowly, you can start investing the interest in Equity Fund. This way you are able to create a corpus which will have risk free investments as well as investments in equity with a high rate of return.

Another advantage of STP is the fact that the transaction charges are nil and there is no risk or actual transaction that is taking place. The transition from one fund to another is smooth.

How does STP Works?

It is always good to know how a certain thing works. Here, in this section, we are going to tell you how STP works. We will again use the example listed above and also, we will explain this in a point by point format.

  • Let us assume that you have invested Rs 20 Lakh in a Debt Fund. You are getting an interest of 7% per annum on your investment and the interest is credited to your mutual funds on a monthly basis.
  • You want to invest this monthly interest in an equity fund to get an even higher return. So, by a simple calculation, you know that you would receive a monthly interest of Rs 11,666.
  • Now, you can approach your broker or you can use the portal that you use to set up an STP. The first thing that you would have to do is that you would have to select the fund that you would like to invest in. You can seek the advice of your fund manager here.
  • After selecting the fund, allocate Rs 11,500 and choose the date of transfer. Once that is done, you can go ahead and set up a transfer request.
  • On the date selected by you, Rs 11,500 would automatically be redeemed from one mutual fund and it will be invested in the other one. This way, you would not have to intervene in the investment process.

This is how the STP works. If you need help in setting up STP then you can get in touch with your fund house or your broker and they will surely help you in setting up one.

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