Moving your funds from one mutual fund to another can be a complex and cumbersome process, especially for beginner investors. Moreover, investing a lump sum amount in a mutual fund at once can be risky, if the value of the mutual fund falls, the value of your lump sum investment will also drop. Fortunately, there is an investment feature called a Systematic Transfer Plan (STP) that allows investors to gradually move their assets from one mutual fund to another.
Understanding systematic transfer plans
A System Transfer Plan (STP) is a facility that allows investors to move their money from one mutual fund to another gradually. Instead of transferring all of your money at once, an STP allows you to transfer a fixed amount of money at regular intervals, usually every month.
For instance, an investor has ₹1,00,000 invested in a certain mutual fund and they wish to move it to another mutual fund. However, they do not wish to move it all at once since the market is in a volatile state. Thus, they can set up an STP to transfer ₹10,000 per month from the original mutual fund to the new one. Over 10 months, they will be able to transfer all of their funds to their desired fund without having to worry about making a lump-sum transfer as the purchase of the new fund will be split across 10 instalments.
Benefits of systematic transfer plans
Here are the key advantages of using a systematic transfer plan to transfer your funds across mutual funds:
- Reduces risk: By transferring your funds across periodic intervals, you are protected against short-term market fluctuations which would otherwise affect your investment in case of a lump sum transfer.
- Rupee cost averaging: Investing in multiple instalments also ensures that you benefit from Rupee cost averaging, as you buy more mutual fund units when the price is low and fewer units when the price is high. Over time, it improves your average buying price of the mutual fund.
- Flexibility: Systematic transfer plans are flexible tools that allow you to customise how much money you want to transfer from one fund to another and how often. You can also stop or change your STP as and when required.
- Better returns: If you wish to transfer a large sum of money into a specific mutual fund over time, you can first move the whole amount to a debt fund or liquid fund and then set up an STP to transfer a certain percentage every month to your preferred fund. In this process, your capital will continue to earn high returns in debt or liquid funds until it is fully transferred to the mutual fund.
To conclude
STPs offer a convenient and hassle-free way to move your money between mutual funds and reduce risk by spacing out the transfer over a period of time. Moreover, STPs are highly flexible so you can customise or make changes anytime during the transfer process if you change your mind. However, if you are confused about how to use STPs or unsure about using them, you should consider contacting a financial advisor for assistance.
