Benefits of STP in Mutual fund
How does STP work
The investor needs to
select a fund from which the transfer should take place and a fund to which the
transfer is taking place. Transfers can be made daily, weekly, monthly, or
quarterly depending upon the STP chosen and the options available with the AMC.
If an investor chooses to
transfer from a liquid fund to an equity fund, the lump sum is invested in a
liquid or a floating short-term plan and is transferred at regular intervals to
a specified equity fund. For example, if one has 50,000 to invest in equities;
he can put the entire amount in a liquid plan and go for a monthly SIP of 5,000
in an equity plan through an STP.
STPs can carry Exit Loads
as per the respective schemes of the AMC.
A Systematic Transfer Plan
is of three types; Fixed STP, Capital Appreciation STP, and Flexi STP.
Fixed STP - In Fixed STP,
the investor takes out a fixed sum of money from one investment to another.
Capital Appreciation STP -
In Capital Appreciation STP, the investor takes the profit part out of one
investment and invests in the other.
Thus, STP is particularly
suitable to investors who have lump sum money and wish to invest in equity
funds but are wary of timing the market. They can then choose to park the lump
sum money in a liquid or debt fund and use the STP option to systematically
transfer a fixed amount of money at regular intervals into the target equity
fund.
Consistent Returns
– Through STP, you can
transfer your money to a target equity fund while you are invested in a debt or
liquid fund. Therefore, you will get the returns of the equity fund you are
transferring into and at the same time remain protected as a part of your investment
remains in debt.
Averaging of Cost
– Like SIP, in STP too, A fixed amount of money is invested in the target fund at regular intervals.
Since it is similar to SIP, STP assists in averaging out the cost of investors
by purchasing more units at a lower NAV and vice versa.
Rebalancing Portfolio
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