1.What is STP?
STP is a facility provided by the mutual fund house that allows investors to invest a lump sum amount in one scheme and transfer regularly a pre-defined amount into another scheme.
The scheme that is considered for lump sum investment is called ‘source scheme’ and the scheme to which the amount is transferred is called ‘destination scheme’ or ‘target scheme’.
Generally, investors put lump sum amounts into a liquid fund and transfer it to an equity fund. This is typically used by investors who are scared to invest a lump sum amount in equity mutual fund due to the volatility in the stock markets.
STP staggers your investment over a period of time and helps maintain a balance of risk and return
2. How does it operate?
If an investor wants to invest Rs 1 lakh in an equity fund through STP, he will have to first select a debt fund. Once that is done, decide on the amount to be transferred to equity funds and the frequency.
For example, he can decide to transfer Rs 10,000 on the 1st of every month for 10 months to an equity fund or even Rs 2,500 every week. Transfer facility is available on a daily, weekly, monthly and quarterly interval. Some portals allow you to do it through multiple AMCs (asset management companies) as well.
3. How does an investor gain?
In an STP , the money remains invested in a liquid fund till it is transferred to equities. This money earns a return, which is generally higher than that of a savings account.
STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV (net asset value) and more at a lower price.
You can also use this strategy to rebalance portfolio across debt and equities. If investment in debt increases then that money can be reallocated to equity funds through STP and if investment in equity goes up then that money can be switched from equity to debt fund using STP.