Systematic transfer plan (STP): Meaning, types and benefits

STP in mutual funds refers to Systematic Transfer Plan. Investors can shift their money from one mutual fund scheme to another by setting up an STP. The money is transferred periodically from the source scheme to the target scheme. The important thing to remember is that an STP can only be set up between schemes managed by the same Asset Management Company (AMC).

There are three types of STPs:

Fixed STP: The investors can transfer a fixed amount to the target scheme.

Flexible STP: The investors can decide the total funds to be transferred to the target scheme based on their needs.

Capital STP: The gains made from the source mutual fund scheme are transferred to the target scheme.

In short, STP in mutual funds means an investment plan in which the investor transfers money periodically from one mutual fund scheme to another managed by same AMC.

Benefits of a systematic transfer plan

Many investors choose Systematic Transfer Plans because of the benefits offered by STP such as:

Rebalancing of portfolio: Investors can choose to invest from a debt fund to an equity fund using an STP in mutual funds. While debt to equity is quite common, it is also possible to transfer money via STP from equity to debt funds. In short, if someone asks you “What is STP in mutual fund”, you can say that it is a strategy to rebalance the investment portfolio.

Relatively lower risk:To lower overall risk, investors can transfer funds via STP, meaning they can set up a transfer plan to shift money from one scheme to another.

Rupee cost averaging: While an STP is different from a Systematic Investment Plan (SIP), both offer the benefit of rupee-cost averaging. This is because the units are allotted each time when transfer is made in the target STP mutual fund When the market is up and the price of units is high, then fewer units are allotted, whereas when the market is down and the price of units is lower, then more units are allotted. In addition, when considering shifting funds between schemes using an STP, it's beneficial to understand the concept of compounding. A mutual fund compounding calculator can help you visualize how reinvesting returns can significantly enhance your wealth over the long term.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.