What is a Systematic Transfer Plan (STP) and how to use one?

Posted By : Kushal Kothari
Tags :  Switch STP

One of the biggest worries we have while investing is a lack of assurance as to whether or not we are 'timing-it-right'. And that's the thing about investing in markets - One never knows what the right time is. This is the exact reason why people are more comfortable investing in mutual funds through SIPs rather than making a lump sum purchase. With SIPs, since a specific amount is invested at regular intervals, one does not have to worry much about timing the market as the purchase value of your investment gets averaged through the ups and downs of market movements.


But what happens when you get those mid-year or year-end bonus payouts? Investing this amount, which can be typically 10-30% of your annual CTC in one single transaction would definitely make you hesitant, won't it? Or what if you want to switch a significant chunk from debt to equity funds or the other way around? This is where a systematic transfer plan (STP) works fabulously to periodically transfer money from one scheme to another. So what exactly are STPs?


Systematic Transfer Plan (STP) -  is a mandate to periodically switch a specific amount/units from one mutual fund scheme to another within the same fund house. Just like how a SIP is  a periodic series of purchase transactions, an STP is a periodic series of switch transactions from one scheme to another.

It makes sure that money is easily switched between schemes without any manual interventions. Let us have a look at some cases where initiating an STP can come in very handy -


1. One-off payouts (Bonus etc.) 
When you get a bonus, it typically earns you 3.5% sitting in the bank account unless you invest it right away. However, investing it all in one go can have market risks. If you want to avoid the risk of wrong timing, an STP can very well help you here.

You can invest your bonus in a liquid/money-market/ultra-short bond fund which typically earns about 6-8% these days and is relatively very safe. This money can then be transferred in pieces to a scheme/schemes of your choice using an STP of the desired time span anytime in the future. Thus an STP offers the flexibility to make your investment plan in the future while making sure your money is still working hard for you. 


2. Rebalancing asset allocation
Let's say your portfolio is heavy on equity allocation and you'd like to bring it down. Or perhaps you think that the markets are quite overvalued and would like to cut some exposure to equities. Thus, if you'd like to reduce the equity allocation from, say, 80% to 60% without timing the market, you can easily do so using an STP from equity schemes to debt schemes of the particular fund house. The same would work in case you want to move your investments from debt to equity schemes, whether for portfolio rebalancing or if you think the markets are undervalued.


This automated, periodic method to switch units in the portfolio using an STP is thus a handy tool for investors to manage their money better.


At Expowealth, we are live with STPs starting today. We'll keep sending more ideas about ways to manage your money better as time goes by. Try initiating an STP, if needed. Let us know if there are more features you'd like to see at Expowealth.


Happy Investing!