Have a fund to invest in, but market valuation seem high? Systematic Transfer Plan (STP) can solve your worries
Due to the rise in stocks, there are many investors who prefer to stay away from the market. There are many such stocks that have reached a record high of 52 weeks, so investors are confused about where to invest their capital. There is a fear of profit booking on investment in them. A Systematic Transfer Plan (STP) is a better option for such investors. Under this, much of the invested capital is invested from debt funds to equity funds.
STP is similar to a Systematic Investment Plan (SIP) in which a fixed amount is invested in a mutual fund from a bank account on a regular basis on a fixed date. STP is a type of SIP that is done from one mutual fund to another mutual fund.
Understand STP like this
- If you have 1 lakh rupees and you want to invest it in the market, then it has to be invested in debt funds first. For this, ultra short term, low duration and liquid funds of debt funds are better options.
- While taking this plan, it is to be decided that how much amount will be invested in equity every month. As you have decided that 5 thousand rupees will be invested in equity funds every month.
- After one month, your debt fund will be left with Rs 95 thousand and the remaining Rs 5000 will be invested in an equity fund. Similarly, every month money will be deducted from debt funds and investment in equity funds will increase.
- Gradually, over 20 months, your entire money will go into equity funds.
- During these 20 months, the amount lying in the debt fund will continue to generate a fixed income.
These are the advantages of investing in STP
- STP can be done between two mutual funds of one fund house (AMC).
- The biggest advantage of STP is that the market timing risk is reduced.
- It is better to invest the lump sum amount in STP than in SIP as it is always considered better to invest the lump sum amount at the lowest price and it is impossible to estimate whether the current price is less or more than the future price.
- In STP, the money remains in liquid or short term funds till it is transferred to equity funds. Returns are also available on the capital invested in liquid or short term funds.