Everything you need to know about STRIP (Systematic Transfer Investment Plan)
Mutual funds have been steadily emerging as a preferred investment option amongst Indian households. They not only allow the investors to benefit from the professional fund management but can also avail of systematic investment strategies like Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), etc.
What is STRIP (Systematic Transfer Investment Plan?
A STRIP (Systematic Transfer Investment Plan) commonly known as Systematic Transfer Plan (STP) is an investment option offered by mutual funds that enable you to periodically transfer your investment in one mutual fund scheme (referred to as the ‘source scheme’) to another mutual fund scheme (referred to as the ‘target scheme’) of the same mutual fund. As such, managing investment through STPs is quite similar to the investments through Systematic Investment Plans (SIPs). The only difference between the two is that while in SIPs, the amount to be invested in the target scheme is deducted from a bank account, and in case of STPs, the redemption proceeds of the source scheme fund the investment in the target scheme.
For example, you have received a lump sum amount of Rs. 2 lakhs, but you don’t want to invest the entire amount right away, as the markets seem to be volatile. To avoid postponement of the investment, you can invest the money lump sum in a liquid fund and then register a monthly STP to shift your invested amount into an equity scheme on a periodical basis.
How does the STRIP (Systematic Transfer Investment Plan) work?
Once registered, STRIP follows a well-defined procedure, as discussed below:
1. Investment in Source Scheme – A pre-requisite to register an STP is an existing investment in the source scheme. As such, you need to make lump sum and systematic investments.
2. STRIP Registration – STP needs to be registered with your fund house to transfer investments periodically from source scheme to target scheme.
3. Periodic Redemption from Source Scheme – On the pre-specified date every month, the fund house will initiate a redemption transaction from the source scheme for the specified amount/ units.
4. Investment in Target Scheme – On the same date, the investment transaction in the target scheme will be processed for the amount equal to the redemption proceeds from the source scheme.
This cycle of concurrent redemption and investment continues until the investment in source scheme reaches zero, or the pre-registered number of STP installments is achieved.
Types of Systematic Transfer Plan or STRIP (Systematic Transfer Investment Plan)
STP can be broadly classified into two categories:
1. Fixed STP – Fixed amount/ units are transferred from source scheme to target scheme on a periodical basis under Fixed STP.
2. Flexi-STP – Flexi-STP empowers the investor to execute STP transactions based on various market-related triggers and quantitative indicators, e.g., market PE, Market P/BV, fund alpha, etc.
Benefits of Systematic Transfer Investment Plan
STP empowers the investors with the following benefits:
1. Financial Discipline – Human minds often tend to procrastinate market investments, basis timing bias. As such, STP helps the investors to transfer amounts in equity schemes periodically from the source schemes and helps them avoid timing the market. Further, systematic investments over a long period average out the cost of investments, as the amounts get transferred across the market ups and downs.
2. Avoiding Idling of Funds – Under an STP, the money continues to stay invested while it gets transferred to another fund. As such, the idling of funds is minimised, and the funds continue to earn better returns.
3. Rebalancing of Portfolio – Asset allocation is the key to long term wealth creation, wherein one needs to strike the right balance between different asset classes. STP allows you to rebalance your portfolio from debt to equity or vice versa while eliminating any emotional bias while switching.
4. De-risk your portfolio – STP can also be used to de-risk your portfolio, as it allows the flexibility to switch from a risky asset class to a less-risky asset class. So, as one nears his/ her financial goal, e.g., child’s education, retirement, etc., it makes sense to register an STP and de-risk their portfolio by systematically transferring your investment from to transferring your investment from equity funds to debt funds.
Who should invest in a Systematic Transfer Investment Plan?
STP can help investors to switch their portfolio risks. As such, it can be used to slowly transfer the investments from a less risky asset class (debt) to a more volatile asset class (equity) or vice versa. Systematic Transfer Plans are thus, suitable for such investors who either have some lump sum amounts (like annual bonus etc.) to invest in a volatile asset class where it is risky to invest the whole amount at one time, or those investors who have a healthy portfolio but want to slowly move their portfolio to debt, as they are approaching their financial goals.
With Systematic Transfer Plans, you can follow a consistent approach to investing, which allows you to systematically manage your asset allocation suiting your risk preferences and create long term wealth.