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What is STP?

Systematic Transfer Plan (STP) is a strategy where an investor transfers a fixed amount of money from one scheme to another, usually from debt funds to equity funds. Investing a lump sum amount in stocks or equity mutual fund could be risky for the investor as stock markets are volatile in nature and returns in equity mutual fund is linked to the performance of stock market. Systematic Transfer Plan helps to keep a balance of risk and return.

STP is ideal for investors who want to invest lump sum money in schemes with stable returns and ensure small exposure to equity schemes in order to avail of the potential for higher growth through equities.

Let’s understand STP with an example.

An investor gives instruction to transfer Rs 2000 from debt scheme to equity scheme every month. In January 2013, he holds 4000 units of equity scheme and 8000 units of debt scheme.

Let’s say in February, the NAV of the debt scheme is Rs 25.

Therefore, number of units required to be redeemed from debt scheme = 2000/25 = 80 units

After redeeming the unitholder will have 7920 units in the debt scheme.

Rs 2000 will be used to purchase additional units of the equity scheme. Let’s say the NAV of the equity scheme in February 2013 is 40.

Therefore number of units of the equity scheme to be purchased = 2000/40= 50 units

The unitholder will now hold 4050 units of the equity scheme.

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