- Date : 23/06/2020
- Read: 4 mins
Every investment comes with risks. Here’s how to mitigate them.
All investments carry potential risks, but there are smart ways to mitigate these risks. One such is the Systematic Transfer Plan (STP). This acts as a defence mechanism, safeguarding investors from probable risks and eventually earning them higher returns in the long run.
What is STP?
Almost everyone in the investment sphere knows about SIP or Systematic Investment Plan. For the newbie, SIPs are safer investment vehicles, wherein you invest a specific amount in your choice of mutual funds every month.
A Systematic Transfer Plan, on the other hand, is an option to transfer funds from one asset type to another, to counter the volatility of the market and ensure a steadier return. The fund transferred from the asset is called source or transferor scheme, and the fund transferred to the asset is called destination or target scheme.
Related: Rupee-cost averaging: Why SIPs are more profitable?
Types of STP
There are two types of STP: Fixed STP and Capital Appreciation STP. For a fixed STP, the source scheme remains fixed throughout the chosen period of transfer, whereas in a Capital Appreciation STP, the appreciated capital (profit) is transferred and invested in the other asset, while the capital amount remains invested in the source asset.
Use-case scenario
The first step is to finalise the amount of money you want to invest using STP. Suppose you want to invest Rs 5 lakh towards a future goal. You need to first invest in a liquid fund. After this, decide on the amount you want to transfer periodically, and the frequency of transfer (weekly, quarterly, or even daily).
So, if you decide to transfer Rs 10,000 every month for three years, this amount automatically gets deducted from your source asset, thereby safeguarding your investment against adverse market conditions.
Note that while the minimum investment amount depends on the fund house, SEBI guidelines mandate a minimum of 6 STPs.
Related: Mutual Funds now becoming the preferred investment choice in small towns over FDs
Benefits of STP to investors
Integrating STP in the investment portfolio has multiple benefits, especially for investors who want to invest a lump sum amount but not put all their eggs in the same basket. Let’s take a look at the various benefits of STP:
- Steady returns – The initial fund is typically invested in a debt fund and which will continue earning interest till the entire amount is transferred. Plus, the returns from STP are more reliable, thereby ensuring an overall steady return, which is usually higher than interest offered by savings bank accounts.
- Better risk management – The primary function of an STP is to lower the risk by transferring funds from a riskier asset class to a safer one.
- Better portfolio balance – A strategic portfolio must strike a healthy balance between equity and debt. STPs help to channel funds from equity to debt funds (or vice versa) for a more even portfolio.
- Averaging out the cost – Since you buy more units at a lower cost and lesser units at a higher net asset value (NAV), you reap the benefit of lower per-unit cost of investment.
Related: A guide to systematic withdrawal plans
Things to keep in mind
It is important to have a long-term vision when committing to an STP. Your lump sum investment should be the ‘spare’ money that you don’t plan on utilising in the near future.
While an STP can enable smarter risk management, it doesn’t make investment risk-free. Be mindful of your choice of assets, the current market conditions, and the stages of investment to reap maximum benefits.
For instance, unless you’re vigilant, you might end up taking capital out when the market is about to peak. But when used strategically, STPs offer multiple benefits and should find a place in every investment portfolio.
All investments carry potential risks, but there are smart ways to mitigate these risks. One such is the Systematic Transfer Plan (STP). This acts as a defence mechanism, safeguarding investors from probable risks and eventually earning them higher returns in the long run.
What is STP?
Almost everyone in the investment sphere knows about SIP or Systematic Investment Plan. For the newbie, SIPs are safer investment vehicles, wherein you invest a specific amount in your choice of mutual funds every month.
A Systematic Transfer Plan, on the other hand, is an option to transfer funds from one asset type to another, to counter the volatility of the market and ensure a steadier return. The fund transferred from the asset is called source or transferor scheme, and the fund transferred to the asset is called destination or target scheme.
Related: Rupee-cost averaging: Why SIPs are more profitable?
Types of STP
There are two types of STP: Fixed STP and Capital Appreciation STP. For a fixed STP, the source scheme remains fixed throughout the chosen period of transfer, whereas in a Capital Appreciation STP, the appreciated capital (profit) is transferred and invested in the other asset, while the capital amount remains invested in the source asset.
Use-case scenario
The first step is to finalise the amount of money you want to invest using STP. Suppose you want to invest Rs 5 lakh towards a future goal. You need to first invest in a liquid fund. After this, decide on the amount you want to transfer periodically, and the frequency of transfer (weekly, quarterly, or even daily).
So, if you decide to transfer Rs 10,000 every month for three years, this amount automatically gets deducted from your source asset, thereby safeguarding your investment against adverse market conditions.
Note that while the minimum investment amount depends on the fund house, SEBI guidelines mandate a minimum of 6 STPs.
Related: Mutual Funds now becoming the preferred investment choice in small towns over FDs
Benefits of STP to investors
Integrating STP in the investment portfolio has multiple benefits, especially for investors who want to invest a lump sum amount but not put all their eggs in the same basket. Let’s take a look at the various benefits of STP:
- Steady returns – The initial fund is typically invested in a debt fund and which will continue earning interest till the entire amount is transferred. Plus, the returns from STP are more reliable, thereby ensuring an overall steady return, which is usually higher than interest offered by savings bank accounts.
- Better risk management – The primary function of an STP is to lower the risk by transferring funds from a riskier asset class to a safer one.
- Better portfolio balance – A strategic portfolio must strike a healthy balance between equity and debt. STPs help to channel funds from equity to debt funds (or vice versa) for a more even portfolio.
- Averaging out the cost – Since you buy more units at a lower cost and lesser units at a higher net asset value (NAV), you reap the benefit of lower per-unit cost of investment.
Related: A guide to systematic withdrawal plans
Things to keep in mind
It is important to have a long-term vision when committing to an STP. Your lump sum investment should be the ‘spare’ money that you don’t plan on utilising in the near future.
While an STP can enable smarter risk management, it doesn’t make investment risk-free. Be mindful of your choice of assets, the current market conditions, and the stages of investment to reap maximum benefits.
For instance, unless you’re vigilant, you might end up taking capital out when the market is about to peak. But when used strategically, STPs offer multiple benefits and should find a place in every investment portfolio.
