From Director’s Desk | Anirudh Dar
STP is a term you may have heard often when investing in mutual funds. You may also have heard of this term as an investment strategy while discussing investments with your advisor. So, what is an STP and which of the above two statements are correct?
An STP stands for Systematic Transfer Plan or simply explained, is the process of automatically transferring a fixed quantum of money from one mutual fund scheme to another one, on a pre-determined date and for a set period or number of installments. The primary reason for setting up an STP is to tide over the short- and medium-term volatility of the stock markets and thus by investing in a systematic manner, an investor would benefit from the averaging that this strategy would bring.
So how does this really work?
STPs work best when done from a debt scheme into an equity scheme by investors who want to invest money as a lump-sum but are unsure about the direction of the markets and would like to tread with caution, instead of trying to time the market. The most important characteristic of an STP is that it only works when both the transferor scheme and the transferee scheme belong to the same asset management company as inter-AMC scheme STPs are not permitted. There are various approaches to start an STP, however the most logical would be one where you chose the equity scheme first, where you would eventually like to invest money and then find a corresponding debt scheme. For example, given that Pharma funds have seen a phenomenal rally and you would like a piece of it, you should first identify the Pharma fund you would like to invest in. Let us suppose you chose Mirae Healthcare Fund. Now that you have identified the equity scheme, the decision to opt for the debt scheme becomes easy, as for one, you can only invest in a Mirae debt fund. Here you may enter in any of the debt schemes like the Mirae Cash Management Fund (which is a liquid fund) or Mirae Short Term fund depending on your preference. Finally, when the funds are invested, you can set up a fixed amount to be transferred into the equity scheme over a period of your choosing.
So how are STPs different from SIPs?
The concept of systematically investing into a scheme may remain the same, but the origin of the funds is different when it comes to differentiating between SIPs andSTPs. For instance, when you set-up a SIP, the funds are debited from your bank account on a monthly, weekly or a quarterly basis whereas in the case of an STP, the funds are transferred between two mutual fund schemes.Another point of difference is that in the case of a SIP, the idle funds continue to remain in your bank account and as a result, accrue the bank savings rate. However, in a STP, since the funds are first invested into a debt fund and will continue to remain there for a certain period, the possibility of generating a return that is more than a simple bank savings rate is substantially higher. For example, if you invested Rs 120,000 in a debt fund and chose to systematically transfer it into an equity fund at a rate of Rs. 10,000 per month, it would take about 12 months for this amount to be fully invested in the equity fund. But, for the period of 12 months, the residual value in the debt fund would continue to grow as well. So, at the end of the 12th installment switch into equity, there is a big chance that you will still have money left into the debt scheme – which is a very real possibility of investing via STPs.
What are the biggest advantages of an STP?
While sum of the advantages have been covered previously, here is a recap and some more benefits of investing in equity mutual funds via the STP route:
- Completely eliminates the need to time the markets as funds are first invested in debt funds which are also less prone to capital erosion.
- While the funds continue to remain invested in the debt fund, the chances of making higher incremental gains is more as opposed to funds lying idle in a savings bank account.
- On instances where markets fall sharply due to any reason, the funds available in the debt funds can be used to do a one-time single installment STP into the equity fund and hence avail the same day NAV of the transferee scheme. If you would try to do this from a bank account, it could take a few days for the AMC to realize the funds and hence you would lose the opportunity to invest on a particular day, especially when you are trying to time your investments on account of a market event.
In conclusion:
An STP is possibly one of the smartest ways to invest in equity markets which are volatile and unpredictable. All one needs to do is identify equity mutual funds as per ones financial goals and select appropriate transferor schemes which do not exit loads and let the concept of rupee cost averaging do its trick.