Systematic Transfer Plan - STP

What is STP?

Systematic Transfer Plan. A cousin of SIP, STP is s systematic Investment for someone who has a lump sum amount but wants to get the advantage of Rupee cost averaging. It is useful for people who get Lump sum amounts and are not assured of a regular and steady income.

How does a STP work?

Let us say I want to buy Onions worth Rs 500- which I will consume over the next 5 months. Taking the rates same as above- Rs.10, 15, 20, 25 and 10 for 5 months and assuming an interest rate of 6% for the next 5 months, we will get the following

	Rate of interest 6%
Month	Amount left	Amount spent on Onions	Rate of Onions	Qty of Onions	Amount left	Interest
1	500	100	10	10	400	2
2	400	100	15	6.666666667	300	1.5
3	300	100	20	5	200	1
4	200	100	25	4	100	0.5
5	100	100	10	10	0	0
5	5	5	10	0.5
	Total	500		36.16666667		5
	Average Price = 500/35.66667=Rs 13.82
	Mathematical Average of Onion Price=(10+15+20+25+10)/5=16

Compared to the SIP example, I get 0.5 kg of onions extra, which is nothing but the interest I earn on the Rs 500 that I keep in a Liquid Fund

In a STP, I keep my lump sum money in a Liquid Fund – which fetches me around 6% - and I transfer a regular amount into an Equity Fund or Balanced Fund of my choice. Advantage is Rupee cost averaging coupled with my idle money earning extra return.

What are the other benefits of STP?

Let us say you are already investing regularly in the form of a SIP. But let’s say you get some lump sum amount – say a Diwali Bonus or an Incentive or some Pension Arrears. You can park the Lump sum into a liquid fund and make a regular systematic transfer into an Equity Fund.

What is the Frequency of Transfers?

Please note that Transfers can be done at periodic intervals like Quarterly, Monthly, Weekly or even Daily. So, in case you are expecting huge volatility over the next month, due to an event like Yearly Results of Companies or Budget or RBI Quarterly review etc, you can go in for a daily STP.

Other Advantages

You can opt for a Flex-STP where in case of a market fall, a higher amount is transferred into the target scheme, thereby investing more when the market is low.

Today, most retired persons face the following problems:

-          Bank FD rates are low

-          Some Balanced Funds offer Monthly dividends but they are not assured

-          MIPs of Mutual Funds don’t guarantee Monthly dividend and Postal MIP is Taxable

-           

So, what is the option for getting a fixed/guaranteed amount every month without affecting the Principal amount Invested?

Prasad wagle 

Financial Advisor