STP stands for Systematic Transfer Plan, “A systematic transfer of funds from one fund to another” known as STP. STP is an Investment strategy and also a risk mitigation strategy.
As per the advice of financial advisor and market trend, STP can be done in a Daily basis, Weekly basis, Montlhy basis and Quarterly basis.
Let’s understand STP through example-
Assume that you are having Rs 18 lakh to invest in the equity, but you don’t want to invest lump sum amount because you don’t know, weather market will grow or fall! Solution of your dilemma is in STP
To invest via STP, your lump sum amount should have to be invested in Debt fund or Liquid fund, because these funds are less risky and provides better returns than the saving accounts. After investing money in Debt fund or liquid fund, you can transfer a fixed amount after consulting your financial advisor to equity fund. You were having the lump sum amount of Rs 18 lakh and that you invested into Debt fund, as per the market trend and advice of financial advisor you started investing in equity fund via STP route, you started an STP of Rs 30,000 per month.
It will take 3 year or more to transfer complete amount from debt fund to equity fund, during this time if market have gone through many up and downs, it will not affect you much, because your money got invested in different time of market trend, so the growth during the time since you started STP and till the last, the returns you will get accordingly, this is how you can mitigate the risk.
STP is a very good option for your lump sum investment, instead of starting SIP of your lump sum amount from savings account, but this will applicable for only lump sum amount, because Debt fund and liquid fund gives better return than the savings account. STP is very similar to SIP but in STP you get extra return of Debt fund or Liquid fund.
There are two type of STP?
- Fixed Amount- When you transfer a fixed amount from one fund to another in a daily, weekly, monthly and quarterly basis.
- Capital Appreciation- When you transfer earned profit from initial investments to equity fund. For example you invested Rs 20 lakh in liquid funds and earned the profit of Rs 5 lakh over it, so this profit of Rs 5 lakh will go in equity fund via STP route, or in any other fund, will considered as the capital appreciation.
Things to know-
- STP is like selling of one fund’s unit to invest in another fund’s unit.
- STP can be done between the funds of one fund house
- Taxation- When you will transfer money from liquid fund to equity fund, then your earned profit will be taxable under debt taxation.