Mutual funds: what is the systematic transfer plan?

-Gopi

The full form of STP is the Systematic Transfer Plan. This is a very useful concept pioneered by the mutual fund industry to help investors avoid stock market volatility.

If you need to invest a small amount each month in the stock market through mutual funds, you can opt for SIP, which is very popular with retail investors. SIP stands for Systematic Investment Plan. However, if you have a lump sum to invest in the stock market, say ₹5,000,000, ₹10 lakh, or even more, it is advised that instead of investing directly in equity mutual funds, you should stagger your investment in debt/cash funds and transfer from there certain amounts to funds equity mutual funds of your choice using the STP tool.

For example, if you have received a bonus of Rs. 10 lakhs from your company and you are planning to invest it in equity mutual funds for long term goals like marriage of your children, education of children or self-retirement etc. instead of directly investing the entire amount of 10 lakhs in equity mutual funds, you can invest the same in debt fund or liquid fund and give instructions to transfer Rs. 1 lakh each month to four different equity mutual fund schemes of your choice by dividing Rs. 25,000 in each of the schemes.

In other words, you have launched four mutual fund SIPs of Rs. 25,000 each for the next 10 months. This way, you will be able to bypass the volatility of the stock markets and you will not be impacted by the ups and downs of the stock market.

However, please note that in STP you must be prepared to pay a small amount as tax on your short-term capital gains which will accrue each time the amount is transferred from the debt fund to the equity fund .

The question is answered by Rajiv Bajaj, Chairman and Managing Director, Bajaj Capital Ltd.

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