You can use systematic transfer plans to invest in equity funds

An STP is recommended for transfers from a liquid scheme to an equity scheme, but you can mix and match your STP investments depending on your goals.

One of the ways to invest a lump sum amount in mutual funds is a systematic transfer plan (STP). In this, the money is systematically moved from a liquid fund to a systematic investment plan (SIP) of an equity fund of your choice.

WHAT IS AN STP?

This is a variant of an SIP—an investor invests a lump sum amount in one scheme, usually a low-risk fund (say, a short-term debt or liquid fund) and regularly transfers a pre-defined amount into another scheme, typically an equity fund, which is meant for long-term wealth creation.

The transfer can happen every month on a specified date (some fund houses offer weekly transfers as well). But do keep in mind that both the schemes have to be by the same fund house. For example, if you have a lump sum of Rs.1 lakh, you can invest this in a liquid fund and set up an STP of, say, Rs.5,000, which will gradually transfer your money into an equity fund of the same fund house.

An STP allows you to systematically invest a lump sum into an equity fund, but at the same time earn slightly higher returns on the uninvested portion that is in the liquid or short-term debt fund, instead of being in a savings account. According to Value Research, the average return of liquid funds in the past one-year period has been 7.89% as on 16 March 2016. In comparison, most savings accounts give 4% per annum (some may give 6-7%).

TYPES OF STPS

One of the types is fixed STP where a fixed sum is transferred from one scheme to the other. Then there is capital appreciation STP. However, only a few fund houses offer this. In this, only the returns are invested in the other scheme; the original lump sum stays in the liquid or short-term debt fund. For example, if Rs.10 lakh is invested in a liquid fund that gives a monthly return of Rs.10,000, then only Rs.10,000 will be transferred to an equity fund.

THINGS TO REMEMBER

An STP is recommended for transfers from a liquid scheme to an equity scheme, but you can mix and match your STP investments depending on your goals. For instance, you can put money in an ultra short-term debt fund or a short-term bond fund and then transfer the money to an equity fund. There is no additional cost involved in starting an STP. However, while most liquid funds don’t have exit loads (a charge for redeeming before a defined period), some others like liquid plus funds may have an exit load period.

It is best to finish your STP within a few transfers, say, 6-9 transfers. This is because the initial sum is limited.

To start an STP, fill the required form (which is similar to the form for an SIP). In the form, pick the target scheme, and specify the amount, number of instalments and the frequency.