A Systematic Transfer Plan (STP) is a valuable investment tool that does not always necessitate an initial lump sum payment. Choosing STP enables you to regularly transfer a set amount at scheduled intervals (weekly, monthly, quarterly) from one mutual fund scheme (source scheme) to another (target scheme) within the same fund house.
Why use the STP option for equity investing?
The STP offers a hassle-free method for consistent investing without the need for manual transaction initiation each time. You have the flexibility to tailor your STP according to your investment objectives and risk appetite by specifying the amount, frequency, and selecting the source and target funds. Although not assured, equity funds typically offer greater return potential compared to debt funds. By incrementally boosting your exposure to equities through STP, you can potentially enhance your long-term investment outcomes.
Financial advisors advocate for using the STP option for equity investing due to several important factors:
Rupee-cost averaging: The stock market is volatile, with fluctuating prices. By consistently investing a fixed amount through STP, you purchase more units when prices are low and fewer when they are high. This strategy helps to average the cost per unit over time, offering potential benefits in equity markets prone to volatility.
Structured investing: Opting for STP instills discipline in your investment approach. By establishing a fixed amount and frequency, transfers occur automatically, reducing the urge to time the market or let emotions sway your decisions.
Incremental exposure: For novice investors or those with a conservative risk appetite, STP provides a method to slowly expand exposure to equities. Beginning with investments in a debt fund, you can gradually shift portions into an equity fund using STP. This approach aids in developing confidence in managing the inherent volatility of the stock market.
Portfolio rebalancing: As time progresses, the composition of your asset allocation—comprising various investments in your investment portfolio—can become unbalanced. For instance, if equity prices increase, their share in your portfolio may exceed your intended allocation. STP offers a strategic approach to systematically transfer funds from equities to debt funds, thereby helping you uphold your desired asset allocation.
Emotionally detached investing: Market volatility often prompts emotional reactions, causing investors to make hasty decisions such as selling during downturns. STP eliminates emotional factors by automating the investment process.
STPs don’t need a lump sum upfront, even though they are advantageous for equity investments. Any amount that you are consistently comfortable with can be used to start with this option. However, choosing the STP option can be a wise move if you have a lump sum and are afraid to invest it all at once because of market volatility. Using the STP, you can first park the lump sum in a debt fund and then progressively move it to an equity fund.
First Published:
20 Jun 2024, 01:24 PM IST
HomeMutual FundsMutual Funds: How does choosing the STP option help advance your investment strategy?
FAQs
By consistently investing a fixed amount through STP, you purchase more units when prices are low and fewer when they are high. This strategy helps to average the cost per unit over time, offering potential benefits in equity markets prone to volatility.
What are the benefits of STP in mutual funds? ›
Benefits of Systematic Transfer Plan:
For instance, if you decided to invest in an equity fund for a duration of till the time of retirement, then you can opt for STP. The STP will save from the future losses of the fund value and will transfer your fixed amount to debt fund.
Why is it important when choosing your investment options? ›
An important part of deciding which investment to choose is to understand your comfort level with risk. Risk is the measure of volatility in an investment's performance. When you make an investment, there is potential that you will have gains or losses due to the rise and fall of the financial markets.
Why do the benefits of a mutual fund help you as an investor? ›
Mutual funds give you an efficient way to diversify your portfolio, without having to select individual stocks or bonds. They cover most major asset classes and sectors.
What is the main reason why you would choose to invest in a mutual fund? ›
The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs.
What are the advantages of STP strategy? ›
It helps companies position their services or products in targeted markets. Doing all this, thus helps in avoiding unnecessary advertising and marketing expenditure. By segmentation, you can segregate customers or likely customers with similar requirements into segments. This helps to attract the right prospect.
What are the advantages of STP? ›
Advantages of the STP cable
It has lower noise and attenuation than UTP. It is shielded with a plastic cover that protects the STP cable from a harsh environment and increases the data transmission rate. It reduces the chances of crosstalk and protects from external interference.
How to choose your investment strategy? ›
Follow these 4 steps to picking your investments and making sure they work for you over time.
- Create a game plan. Investing works best with a plan. ...
- Choose your investments. With your time horizon and risk tolerance in mind, it's time to look at your investment options. ...
- Buy your investments. ...
- Check in.
For speculators, options can offer lower-cost ways to go long or short the market with limited downside risk. Options also give traders and investors more flexible and complex strategies, such as spread and combinations, that can be potentially profitable under any market scenario.
Why do people choose options? ›
Options can allow you to generate income.
Some stockholders sell call options against their stock positions or write put options as a way to create income. Such strategies can be attractive and relatively low-risk ways to use options.
One of the primary benefits is diversification, which reduces the risk of loss by spreading investments across a wide range of assets. Mutual funds also provide professional management, allowing you to leverage the expertise of fund managers who make investment decisions based on their research and analysis.
What is the main advantage of mutual funds? ›
Mutual funds have plenty of advantages, including diversification, professional management, low costs, and convenience.
What is the main advantage of a mutual fund for an investor on Quizlet? ›
What is the main advantage of a mutual fund? They give small investors access to professionally managed, diversified portfolios of stocks, bonds, and other securities.
Why is mutual fund the best investment option? ›
Low Cost — An important advantage of mutual funds is their low cost. Due to huge economies of scale, mutual funds schemes have a low expense ratio. Expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund's daily net assets.
Is mutual fund really beneficial? ›
Mutual funds may be a good investment for anyone looking for diversification in their portfolios. Learn whether mutual funds can be the right investment for you. Mutual funds offer diversification and convenience at a low cost, but whether to invest in them depends on your individual situation.
What is a benefit enjoyed by investors in mutual funds? ›
By purchasing mutual funds, you enjoy the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios.
What are the disadvantages of STP in mutual funds? ›
The investor is also liable to taxations on the returns gained on STP since it is nothing but mutual fund gains only. The short term capital gains or STCG are taxed at 15% whereas the long term capital gains or LTCG are tax-free up to Rs 1 lakh, above which a 10% tax is levied.
Is STP a good investment? ›
Higher Returns: STPs allow investors to earn higher returns by shifting to more profitable ventures during market swings. 2. Stability: During market volatility, investors can transfer funds to safer investment schemes like debt funds, ensuring stable returns. 3.
What is the main purpose of an STP? ›
The Segmentation, Targeting and Positioning (STP) Model helps you position a product or service to target different groups of customers more efficiently.
Why is STP so important? ›
It makes your marketing communications more focused, relevant, and personalised for your customers. In short, STP is a marketing approach where you segment your audience, target the best-fit audience segments for your product, and position your product to capture your target segment effectively.
