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
