What is STP in Mutual Funds? If you are currently investing in the stock market or participating in mutual funds through SIP, it’s essential to be cautious, especially when market indices are reaching all-time highs.
In such situations, it’s crucial to protect investments carefully. One strategy that can be employed in such scenarios is a Systematic Transfer Plan (STP). In this article, we will discuss the precautions that should be taken when choosing this strategy.
What is STP? While most of us are familiar with the Systematic Investment Plan (SIP), which aids disciplined investment in mutual funds, STP is another powerful tool.
This tool can be handy for balancing investments, particularly when the market is experiencing positive growth.
Typically, mutual fund companies offer various schemes, allowing investors to transfer money from one scheme to another over a fixed period through STP.
This method is commonly used to transfer funds from debt to equity schemes. It can also reduce the equity portfolio during bullish market conditions.
How does it work? Investors initially invest their money in low-risk schemes such as liquid or debt funds offered by a fund company.
Subsequently, a fixed amount is transferred into equity funds over time through STP. By adopting this approach, investors can spread their investments over some time rather than investing all at once, which can provide them with an average benefit.
Why is it necessary? When market indices are at higher levels, they are susceptible to correction. To mitigate this risk, the STP strategy allows investments to be made gradually over time instead of all at once. This approach enables purchasing more units when the market experiences a decline.
Reducing the fear of loss! Regardless of one’s experience level, it is difficult to predict how the stock market will react. By utilizing STP, investors can spread their investments across different market levels instead of investing all at once when the indices are high, thereby significantly reducing the risk of loss.
Emotional control! During market peaks, investors often worry about an impending downturn, leading to fear of investing.
STP helps manage such emotions by enabling investments in debt funds when the market is at its peak and gradually shifting investments into equities during corrections.
Therefore, STP should be strategically employed during volatile market conditions or when the market reaches new highs.