What is STP and how to use it wisely

Indian equity market is currently trading at their lifetime high. Many investors who have not yet boarded this bandwagon might be feeling a sense of being left out. They may be sitting on sidelines with the lumpsum amount and looking for an opportune time to enter the market. The ideal way of investing in the current situation when the market is trading at an all-time high is in a staggered manner. This helps investors to sail through volatility in the equity market in a better way.

One of the easiest ways to start is with systematic investment plan (SIP). Nevertheless, if you have a large amount to invest in and the amount is lying in your saving account it will earn sub-optimal returns, till the time you exhaust your fund through SIP. In such situation, investing in systematic transfer plan (STP) makes sense. STP allows an investor to invest a lumpsum in one scheme and then transfer a pre-determined amount at a pre-determined date to another scheme. Mostly the lumpsum is invested in debt funds and STP is done to an equity scheme. The benefit of using STP is that you get a better return as debt mutual fund usually gives better return compared to the interest that you earn on a bank’s savings account.

In the last one-year, on an average returns generated by debt fund is more than 7 per cent which is greater compared to 4 per cent that you get if you park your money in a savings account. This difference in absolute terms get amplified as your amount gets higher. Therefore, if you want to invest just Rs one lakh and spread your investment for a year, the benefit of STP works out to be around Rs. 1,000. This will grow in same proportion as your investment amount grows.

Nonetheless, there are some caveats to this. One is that both schemes should be part of the same fund house. Hence you cannot invest lumpsum amount in HDFC MF schemes and to STP to SBI MF schemes. Besides, you should also be mindful of any exit load if charged by the debt fund. There is also a short-term capital gain tax involved in such transfer, which is added to your income and taxed based on your tax slab.

Therefore, STP is recommended if you have a large amount to invest and want to complete your transfer within a year.

You can also use STP to maximise your gains while achieving your financial goals. This can be used using other types of STP known as capital appreciation STP (not all fund houses offer this). If you have achieved your financial goals earlier than expected, you can transfer the fund to safer debt funds and use capital appreciation STP, which invests only the returns generated by debt funds, to invest in equity schemes. For example, if your lump sum amount invested in debt fund is Rs 20 lakh and is generating 1 per cent return that is Rs. 20,000, this amount is invested in equity schemes. This will help you to participate in a rally in equity market as well keep your lumpsum investment almost safe. Hence, if STP is used wisely it will help you to optimise your returns.