Consider STP or Systematic Transfer Plans in Mutual Funds a version of the Systematic Investment Plan (SIP). It helps you to invest a fixed amount in a particular Fund on a monthly basis.
STP V/S SIP
In an SIP, your money moves from you bank account to a Mutual Fund. In an STP, it moves one Fund to another.
HOW IT WORKS
It is simple. First step involves accumulating investments in a Fund. When you want to exit this MF scheme, you sigh up for an STP and specify and new Fund and monthly amount. The STP will exit your previous investment and move your money to the new Fund every month.
LIQUID TO EQUITY MF
The most common use of STP is to first invest your entire investment amount in a Liquid Fund in lump sum and then transfer it to an Equity Fund every month. This helps you earn by Equity Funds at different market prices, thus averaging your cost and lowering risks.
EQUITY TO DEBT MF
Another common use of Systematic Transfer Plans is when you want to lower the risks of your investment, say at the age of 55. You then systematically move the Funds to a Debt scheme that can help you protect your money until retirement.
When you start Systematic Transfer Plans, you are essentially selling your investments in an old MF scheme and buying a new one. This means you could be eligible for Capital Gains Tax wither for the short term or long term. Consider this before making your decision.
Before you start an STP, don’t forget to consider the Exit Load on your prior MF investment. This could eat into your returns. This is explained below. Not only above these, but also Follow the next…….