You may be aware of SIPs or systematic investment plans, but most people do not know what an STP is. While there are certain similarities between SIPs and STPs, here is a detailed look at what a systematic transfer plan is and how it works in favour of investors.
What is systematic transfer plans?
Systematic transfer plans are specialized plans where your money is transferred automatically from one mutual fund investment scheme to another. This is similar to SIPs, but here the money you make through investments is transferred in other investments. However, in the case of SIPs, the money from your savings account is transferred in investment schemes.
With systematic transfer plans, investors are can invest a sum into a specific mutual fund. The money from this fund can then be transferred into other schemes in order to diversify the investment profile. Furthermore, such diverse investment will also reduce the risk of losing money.
Benefits of STP investments
If you have excess funds in your mutual funds, you should consider engaging a systematic transfer plan. Here are some benefits of such a plan.
- Decreased market risk
In case of a lump sum investment, you are liable to invest a huge sum of money at once. This may lead to greater liabilities and reduced return on your investment. However, with STP, you are investing over a period, which reduces the chance of incurring losses. Instead, you may end up with sizable profits.
- Returns are greater
Unlike lump-sum investments, an STP allows you to invest in both debt and equity instruments. Therefore, you are ensured a diversified investment portfolio, where the risk and returns are balanced. The debt funds ensure lower risk, while the equity investments will earn you sizable returns.
- Adjustable rate of investment
Even if you sign up for an STP, you can change the rate at which you invest. You can increase the speed of your investments or slow it down depending on the prices of the stocks in the market. You are free to change the rate of investment at any time during the tenure of investment.
- Rupee cost averaging
Investments through STPs allow you to buy different equity stocks at different net asset values. This will help you to average out between the market highs and lows. Therefore, this rupee cost-averaging factor in STPs will further decrease your chances of incurring losses.
You should consider investing through SIPs if you are a completely new investor. However, if you are sitting on returns from mutual fund investments, you should look into STPs.
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