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How Systematic Transfer Plan of mutual fund works? Benefits and other details

How Systematic Transfer Plan of mutual fund works? Benefits and other details

How Systematic Transfer Plan of mutual fund works? Benefits and other details
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By Anshul  Jul 28, 2020 6:27:20 PM IST (Published)

Systematic Transfer Plan (STP) allows investors to transfer funds from one scheme of a mutual fund to another scheme of the same mutual fund.

Systematic Transfer Plan (STP) allows investors to transfer funds from one scheme of a mutual fund to another scheme of the same mutual fund.

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Similar to a Systematic Investment Plan (SIP), STP is also an automated process wherein on the instructions of the investor, the fund manager or asset management company (AMC) regularly transfer funds.
The frequency of transfer can be weekly/fortnightly/monthly/quarterly/semi-annually or annually.
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"Generally, a lump-sum amount is invested into short to medium term debt fund, and then with regular frequency a portion of the investment in debt fund investment is switched into equity or hybrid fund of the same AMC," explains Omkeshwar SIngh, head - RankMF, Samco Group.
Sometimes, lump sum investments are also done in hybrid fund.
However, Singh warns investors against doing so.
"Hybrid funds have exit load," he says.
This means investors will be charged a fee while making the transfer, thus making STP a costly affair.
According to Rachit Chawla, founder and chief executive officer, Finway, STP helps investors in reducing the risk exposure in volatile markets.
Saurav Basu, head of wealth management, Tata Capital calls this approach of asset allocation a systematic and staggered one
"Transferring funds from debt to equity allows investors to leverage the tide of the stock markets in their favor and cash in on maximum profits. This realignment ensures wealth maximization," he says.
However, since this is a risk mitigation strategy, these may yield less or capped returns even in a bullish market.
When compared to SIPs, STPs have an edge, according to Rahul Jain, head of Edelweiss Wealth Management.
"Returns in debt funds are usually higher than traditional bank saving accounts. So the money earns a decent return in debt funds while waiting to be transferred to equity," he explains.
STP also helps investors in changing their investment goals as per their life goals.
Basu explains this with an example.
"If a potential investor is looking to save for his retirement, he can invest through an STP in an equity fund to earn better returns and then move the funds to a debt fund to conserve equity profits and minimise risks," he opines.
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