STP in Mutual funds – Is it useful ?
Systematic Transfer Plan (STP) is a popular investment tool offered by mutual funds that allows investors to transfer a fixed amount of money from one scheme to another. STP is a way to systematically invest in mutual funds while also managing risk.
STP allows investors to transfer a fixed amount of money from a debt scheme to an equity scheme or vice versa, depending on their investment goals and risk appetite. This way, investors can manage their portfolio and gradually move towards their investment goals without exposing themselves to undue risk.
How STP in mutual fund works ?
The way STP works is simple. Investors can invest a lump sum amount in a debt scheme and then transfer a fixed amount of money to an equity scheme on a periodic basis. For instance, an investor can invest a lump sum amount of Rs. 1 lakh in a debt scheme and transfer Rs. 10,000 to an equity scheme every month for 10 months.
STP helps investors take advantage of market volatility by investing in equity schemes at different points in time. This way, they can average out the cost of investment and reduce the risk of investing all their money at one time.
Let us take an example to understand this STP or Systematic Transfer plan in a better manner.
Tata Digital India fund was one of the best performing fund till January, 2022. Due to US recession fears and increase in interest rates in US, most of the IT stocks in US and across the world started falling. Indian IT stocks depends on US and other European markets as those are their primary markets.
In the long run, this is one of the best performing mutual funds but it may not be a wise idea to invest fully in this fund.
Source – Advisorkhoj
Buying pattern after initiating STP from Tata Ultra short term fund to Tata Digital India fund
First units are bought in Tata Ultra short term fund and then transferred 20,000 on a monthly basis
If someone is investing fully in this equity fund, he would have bought at a NAV of 40.69 Rs
The current NAV as of May, 2023 is also around 31 Rs only.
If you look at monthly units, from 491.434 units it went upto 646.412 units as NAV dropped from 40.69 to 30.94
No one knew such fall and this is a pure advantage of investing via STP.
ICICI Prudential value discovery fund :
Similar to previous example, invest in ICICI Prudential ultra short term fund to ICICI prudential value discovery fund
Buying pattern after initiating STP from ICICI Prudential Ultra short term fund to ICICI Prudential Value discovery fund
First units are bought in ICICI Prudential Ultra short term fund and then transferred 20,000 on a monthly basis
NAV was 247 in the first month and then it went up in February month. In July month it went down to 237. By October, 2022 the NAV was 261. So within 10 months, the NAV went up and down.
Using this Systematic Transfer Plan or STP has helped in buying units across several months. Again no one knew the nature of NAV in the future but that is the advantage of STP In mutual funds.
Advantage of STP in mutual funds
STP can be an effective tool for investors who are risk-averse and want to invest in equity schemes but are hesitant to do so because of the risk involved. By transferring a fixed amount of money from a debt scheme to an equity scheme, investors can gradually increase their exposure to equity without exposing themselves to undue risk.
Moreover, STP allows investors to maintain their asset allocation over a period of time. Asset allocation is the process of dividing your investments among different asset classes such as equity, debt, and gold. By maintaining a proper asset allocation, investors can reduce the risk of their portfolio and maximize returns.
You should choose a correct equity fund to take advantage of this STP, else at times it may look a waste of time as NAV may keep rising.
Conclusion
In conclusion, STP is an excellent investment tool offered by mutual funds that can help investors manage their portfolio and gradually move towards their investment goals. By investing in a debt scheme and transferring a fixed amount of money to an equity scheme, investors can take advantage of market volatility and reduce the risk of investing all their money at one time. Therefore, STP is a useful tool that investors can consider when investing in mutual funds.
Does STP in mutual fund reduces equity risk ?
Very true, STP allows investment amount to be transferred from Debt to Equity over a period of time and hence reduces the risk of investing in equity all at once.