Systematic Transfer Plan (STP)

Published On: 01-Sep-2017

Meet Rishi, a marketing professional who works at a big consulting company for his living. He was introduced to mutual fund investing by his childhood friend and colleague Ashley who works in the same firm. Rishi was fascinated by the stock market but was always wary about its ups and downs. That’s when Ashley told him about SIP and its benefit. He liked the concept of rupee cost averaging and investing small. He immediately started investing under the guidance ofAshley.

Few years went by and his investments were doing quite well. Then suddenly the financial crisis eruptedin 2008 wherein certain part of his gains was wiped off by the market fall which made him jittery. With the continuous nagging from his wife, he became restless and immediately called up Ashley for the help. They met in their office the very next day and sat in a meeting room and discussed about Rishi’s investments in the stock market.

Ashley listened very calmly and hadby then figured out that Rishi could not handle the volatility of the market. Rishi liked investing regularly in mutual funds but gets anxious when markets were sliding downwards. 

And then he wrote three letter words “SIP” & “STP” on the white board. 

He explained, “SIP is a good tool for the ones who do not see the market levels and their investment value very often. The ones using SIP should attach their life goals with the investments and only review their investment periodically and not give a heed to what the so-called experts have to say on the news channels.

Ashley continues, “Such events would come and go in the markets and it should not deter a long term investors”. 

Rishi listening with great interest asks, “But then what should I do in such a situation and what is STP?”

Ashley smilingly replies, “Either you continue your SIP and be patient or opt for a STP or Systematic Transfer Plan. With SIP you invest fixed amount irrespective of the market condition. It really works well during the bearish market condition, as you could buy more units with the same investment amount. But on the flip side, when the market goes up you could buy fewer units.”

Rishi looks perplexed but listens patiently to Ashley. 

Ashley, “Now as you have better understanding about the stock market and also want to restrain your losses when the markets correct, I think you can graduate to another level and start using STP to benefit when the market is running up and restrain your losses when the market moves down.”

Rishi excitedly asks, “But how?”

Ashley, “As you know stock market works on a single principle i.e. buy low and sell high! STP also works on the similarprincipal. With STP you can easily transfer your investment from one scheme to another within a single AMC depending on your outlook of the market. Assume you feel that the market has moved up significantly, start an STP from your existing investment in the equity scheme to a debt scheme. This helps restrict downside when the markets correct. While when the markets seem to have corrected significantly, you can start an STP from the debt scheme to equity scheme. This helps capture the upside and helps benefit during different market phases”

Rishi thrilled with the idea, “Please tell me more about STP and how to start?”

Ashley smilingly, “it just requires a one-time registration process. While there are various types of STP available like-

  • Fixed STP

Here you can transfer a fixed amount periodically from one scheme to another. 

  • Capital Appreciation STP

You can transfer full / part of profits from one MF scheme to another. That is if markets are rising, you can transfer certain part of profit from your equity scheme to debt scheme and vice-versa when markets were headed downwards. 

  • Flexi STP

Here, you can transfer any or variable amount based on your liquidity

A wide grin appeared on Rishi and his friend’s face.

Rishi replied, “Is it not like Systematic Investment Plan (SIP)?”Ashley smiles, he knew that Rishi was thinking in the right direction. Ashley replied, ‘Yes, it is to certain extent. However, STP allows transfer of money from one scheme to another whereas SIP is about investing in the same scheme on a regular basis through your savings account. SIP is created to inculcate discipline while STP is created to protect the profits.’

On hearing this, Rishi with a glow in his eyes hugged Ashley and confidently calls his wifeto pacify her. 

So what are you waiting for, start your STP before your wife starts nagging.