STP is a strategy for scheduled transfer of funds in mutual funds from one scheme to another scheme. STP transfers a fixed amount of money in a periodical manner. STP is closely related to SIP which is another common method of mutual fund investing. A SIP invests a fixed amount in a mutual fund at regular intervals whereas a STP transfers a fixed amount from one mutual fund scheme to another.
The main idea behind a STP is to minimise risk of a lumpsum investment by staggering your investment. In STP, an investor can switch only between various funds of the sameAMC; Inter shifting between different AMCs is not possible.
There is no entry load on mutual funds but exit loads are charged up to maximum 2% while transfer or redemption of funds. There is no minimum amount of investment in STP, however it’s advisable to have a minimum investment of Rs.12,000. The minimum transfer from source fund to the actual fund must be of 6 instalments minimum. STPs are effective in goal based financial planning and it is becoming one of the best investment tool in India.
Benefits of STP
- Stability: During times of volatility, the investor can route the funds through STPs into a safer investment. This allows an investor to have financial stability while earning returns at the same time.
- Rupee Cost Averaging: Rupee cost averaging is staggering the investment in multiple instalments to enter at different market levels. STPs average out the NAV and protects from buying in a high market.
- Balancing the Portfolio: STPs can be used to balancing the debt and equity ratio by moving funds from debt to equity or vice versa.
Disadvantage of STP
- Restriction in Switching: An investor can switch only from one scheme to another in the same AMC. Inter shifting of funds between AMCs is not an option.
- Timing the Market: Although investments through STPs seem to provide higher return by Rupee Cost Averaging, guaranteeing higher returns is not possible. Timing the market is not possible for anyone.
- STPsare a good option for investors who have a lumpsum amount. An investor should have considerable knowledge about mutual funds if STP is chosen. Exit loads and taxation should be considered while investing through the STP route.
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