Health discipline seems to have found favour with the proliferation of fitness / yoga studios, running , cycling trekking clubs and the generally increasing awareness building. Extending discipline to personal finance and can even be ignored blaming it to be complex and time consuming. Opportunity loss from inactions or partial actions are difficult to calculate. Just moving the salary from savings to mutual fund liquid schemes and moving it into a Equity scheme SIP is better liquidity management with the benefit of higher return. But it can appear complex . This is where Systematic Transfer Plan comes in handy.
How STPs work
STP, in essence, operates by structured transfer of investment from one scheme to another scheme within the same Mutual Fund over a designated period of time. It is an extension of the Systematic Investment Plan (SIP); the difference between the two schemes is that whilst SIPs allow for investing small amounts of money in a mutual fund at fixed intervals, STPs enable transfer of money invested in one scheme into another scheme of the investor’s choice.
Fixed and Flexible STPs
Investors may choose to invest in STPs via fixed and flexible modes. Fixed STP schemes provide for transfer of a pre-determined amount of money the primary fund to another chosen fund type at regular intervals. Flexible STP differs from the former in that there is no predetermined value of money to be transferred; it simply allows capital appreciation in the primary scheme to be transferred to the other scheme.
On that note, it should be taken into account that STPs typically require the investor to make a specified minimum investment in the primary scheme.
A risk mitigation option for exits
STP also doubles as an excellent strategy for investors looking for options to exit from equity funds. The scheme provides for systematic transfer of funds from equity to asset classes with lesser risks, such as debt funds. As money is moved into a safer asset class, wealth accommodated in equity will continue to compound and deliver, considerably shielding the investor from the overall impact of liquidating investments.
Factors to be considered
It is recommended that eligibility for capital tax gains, for short term or long term, and the relative exit load on investment that would impact returns, before choosing to invest through a STP scheme. In general, seeking professional guidance from investment advisors would be of great assistance to begin navigating through different investment options.
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