Systematic Transfer Plan

by admin October 26, 2016

Systematic Transfer Plan

Before we understand  STP, we must know about Systematic Investment Plan(SIP) first. SIP is a disciplined way of investing where investors invest a regular sum every month in mutual funds. It is also known as rupee cost averaging and it is the best way to handle volatility in an investment.

STP is a variant of SIP. It is transferring investment from one asset class or asset type into another asset or asset type. The transfer happens gradually over a period.

It is of 2 types:-

1) Fixed STP

It is one in which investors take out a fixed sum from one investment to another.

For eg.:- Suppose you have invested Rs.5 lakhs in debt funds because you thought the market is trading close to its peak. The P/E ratio of the market is 25 and hence you think that fall is imminent. In such case one can withdraw a fixed amount from your debt fund investment and invest in equity oriented fund and this can go on for several months depending on your choice. Thus this strategy(STP) acts as a defense against any adverse movement of the market.

 

2) Capital appreciation STP

Here the investors take the profit part out of one investment and invest in the others.

Following the above e.g. only:- If the investors have invested 5 lakhs in debt fund and in a month, suppose the return is 1%, this means that his investment has grown by Rs.5000. The investor will take out this money and invest in an equity fund. This strategy is good for conservative investors who want to protect their principal.

 

Conclusion

To conclude we can say that:-

1) It is possibly the second best investment strategy after SIP.

2) It is one of the best risk mitigation strategies of the market.

3) Investors need to follow it with discipline just like SIP to ensure consistent returns.

 

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