In an earlier post, I wrote about how you can start investing with small amounts in mutual funds via SIP & make the volatility of the market work for you in the form of Rupee Cost Averaging.
But what if you have a large amount of money available with you and you want to invest all of it as a lump sum? Is there a way to let market volatility work for you, even when you choose lumpsum investment mode instead of SIP?
Yes! Mutual Fund houses have come up with many different investment modes/routes to help investors. One such route is Systematic Transfer Plan (STP)
What is STP?
STP is a mode of investment where the investor can invest his/her money in lumpsum in one mutual fund scheme & transfer a fixed amount of money from that scheme to another scheme at defined intervals. Generally, STP is a transfer from debt mutual fund to equity mutual fund.
Let’s understand this with the help of an example: Let’s assume that you received ₹6 lakhs by selling an asset. Now you have a large amount of money lying idle in your saving bank account. Since savings bank accounts provide very low-interest rates, you are not letting your money work for you. You want to invest in an equity mutual fund and enjoy higher returns but are scared to put all of it in one go.
You can choose the STP mode, and invest the entire lump sum amount in a debt mutual fund. Debt funds have a negligible risk factor and they give higher returns compared to a savings bank account. Then, you can transfer some amount from the Debt fund to an Equity fund of the same fund house at regular intervals, let’s say ₹10,000 every month. This way you invest systematically in equity mutual funds, by way of regular transfers, all the while earning higher returns from debt mutual funds.
STP works best for investors who want to invest a big amount in equity mutual funds with the goal of long term wealth creation. Systematic Transfer Plans allow you to avoid becoming a victim of market volatility while investing lump sum amount of money.
How does it work?
STP is very similar to SIP. The only point of difference is that in a Systematic Investment Plan the investment money comes from your bank account & in a Systematic Transfer Plan the investment money is transferred from one fund scheme to another.
You invest the lump-sum in a debt fund scheme & give a standing instruction by filling the required STP form to deduct a fixed amount of money from the debt scheme and transfer the same to an equity scheme.
Things to keep in mind
- STP can work within the same fund house only, i.e. both source and target schemes should be of the same fund house. So you can transfer from Principal Debt Opportunities Fund to Principal Emerging Blue-chip Fund but not to SBI Blue-chip fund. I recommend you first choose the equity scheme of your choice, & then decide on the debt scheme.
- Usually, a minimum of 6 transfers is required to invest in STP.
- The minimum amount required differs from the fund house to fund house.
- Every transfer is considered as a redemption from the debt scheme and investment in an equity scheme. Since these transfers are basically redemptions, they will be taxed accordingly. I have written about taxation on income from mutual funds here. But in spite of taxation, you will still earn more than you would with a bank account.