To reduce the risks involved in investing, financial planners advise investors to stagger their investments into equity mutual funds over the next 6-12 months, using a systematic transfer plan, or STPs.
STP helps you stagger your investment over a period of time and maintain a balance of risk and return. Those who want to invest systematically in equity mutual funds, especially during volatile equity market conditions, and earn riskfree returns by investing in liquid ultra short term schemes, use this strategy. In STP, a fund house allows investors to invest a lumpsum amount in one scheme and transfer regularly a pre-defined amount into another scheme. The scheme considered for lumpsum investment is called `source scheme' or `transferor scheme', and the scheme to which the amount is transferred is called `destination scheme' or `target scheme' or `transferee scheme'. In most cases, investors park the lumpsum amount in a liquid ultra short term fund and transfer it to an equity balanced fund.
If you want to invest Rs 1 Lakh in an equity fund using STP, first choose the liquid or ultra short term fund. Once that is done, decide on the amount to be transferred to an equity fund and the frequency of transfer. Most fund houses have a daily, monthly, weekly and quarterly option to transfer money. For example, you can decide to transfer Rs 10,000 every month on the 1st of every month for 10 months to an equity fund or even something like Rs 2,500 every week. In the offline world, you will have to transfer from the debt fund to the equity fund of the same fund house. But some online portals allow you to transfer from a debt scheme of one fund house to an equity scheme of another fund house.
In an STP, the money remains invested in a liquid ultra short-term fund till it is transferred to an equity fund. This money earns a return, which is generally higher than that of a savings bank account. STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price. Some wealth managers also use this strategy to rebalance portfolio across debt and equities. If investment in debt increases, money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund, using STP.