What is a systematic transfer plan and how does it work?

A Systematic Transfer Plan (STP) allows you to transfer a fixed unit/amount from your investment in one scheme of one fund to another scheme managed by the same fund house on a fixed date every month.

You can initiate an STP by investing a lump sum in a mutual fund scheme and instructing the fund house to transfer a specified number of units or an amount from that investment to the designated scheme.

STP stops automatically when all the money in the original scheme is transferred to the destination scheme within a certain period of time.

STP is usually done by investing a lump sum in a debt scheme and transferring the money over time to an equity scheme or vice versa.

Also Read: New to Mutual Funds? Know these terms before investing

There are two types of STP in mutual funds:

Fixed STP: In Fixed STP, a fixed amount is transferred from one mutual fund scheme to another like monthly or quarterly.

Capital Gain STP: Capital Gain In STP, the capital gain from one mutual fund scheme is transferred to another scheme.

According to the information on Mirae Asset mutual fund website, benefits of Systematic Transfer Plan;

-Investment Rebalancing: STP helps in portfolio rebalancing by reallocating investments from debt to equity or vice versa.

– Cost Averaging: STP has some integral features of Systematic Investment Plan (SIP). One of the differences between STP and SIP is the source of investment. In the first case, the money is usually transferred from the loan fund, and in the second; it is the investor’s bank account. As it is similar to SIP, STP also helps in cost averaging of Rs.

– High return goals: Money invested in debt funds usually gives returns before being transferred to equity funds. The returns on debt funds are generally higher than savings bank accounts and tend to provide relatively better performance.

Additionally, it is important to carefully consider the specific mutual fund schemes as well as the fees and expenses associated with STPs. It is always recommended to consult a financial advisor before making any investment decision.