Three Main Categories Of Systematic Transfer Plans

Greetings,

In our previous post, we covered Life and Health Insurance, In this post we’re going to look at Systematic Transfer Plans and the many associated benefits.

Since the tag line that goes with all mutual funds is that they are subject to market risk, financial experts recommend Systematic Transfer Plans (STP) to spread investments out over a longer period of time in order to mitigate risk as much as possible. As opposed to investing a lump sum amount in one go, you invest a fixed amount periodically in order to reduce the propensity to market fluctuations.

Now in case you’re thinking that this sounds like Systematic Investment Plans, STPs are actually different. How they work is that your entire investment is first parked in a liquid or liquid plus funds where it generate steady returns at prevailing interest rates, while a fixed amount is earmarked for periodic investment in prospective schemes under the same fund house. There are three main categories of STPs:

Fixed STPs

In the case of a fixed systematic transfer plan, the total amount to be transferred from one mutual fund to another remains constant and you can choose between annual and periodic investments. Annual investments can be 1 year, 2-year, and 3-year investments, while periodic investments are weekly, fortnightly, and monthly. While daily investment is also available when the market is open from Monday to Friday, this isn’t advisable.

A good example of a fixed STP is if you had 5 crore rupees to invest & invested in 5 different STPs at 1 crore each and set them all to fortnightly investment (15 days ). What you would effectively have is ( 5*48) investments, or 196 investments, spread across 2 years. This effectively does two things, gives you the benefit of rupee cost averaging so instead of buying at one particular NAV, you buy at an average, hence reducing the associated market risk. Secondly, your corpus that’s parked in a liquid or liquid plus funds are still earning interest and compounding.

Flexible STPs

With flexible STPs, the amount and periodicity aren’t fixed and are decided upon as and when the need arises. These funds are typically actively managed and investments are made based on current market volatility as well as a number of calculated predictions.

Capital STPs

Here only the profit or capital gain on a particular fund is then transferred to another fund that shows more promise or potential for growth. An important point to note, with regard to all three types of STPs that we’ve covered is that funds can only be transferred from a mutual fund scheme to another scheme of the same mutual fund house and not across different fund houses.

The power of averages

With regard to market risk in particular, in an ideal world, we would buy when the market is low and sell when the market is high. If anyone could correctly predict that, however, there wouldn’t be any need for financial experts or even mutual funds for that matter. While the reality is that the market is and always will be unpredictable, risk can be mitigated by investing wisely while also maintaining caution and discipline. Please feel free to contact us to know more about STPs and which one would best suit your investment profile.


Comments

  1. UnknownJune 17, 2022 at 4:31 AM

    Amazing write-up! You always have good humor in your Blog's , So much fun and easy to read! Open Indian Bank Account Online

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