It's highly possible that you would like to switch from one fund to the other for various reasons when investing in a mutual fund.
Systematic Transfer Plans: Why It Is Important In A Mutual Fund?
Systematic Transfer Plan or STP is a mechanism whereby you can switch your funds from one mutual fund scheme to the other. It give the mutual fund the authorization to effect such a switch periodically, depending on the investor. You can choose the number of units to be transferred along with the timing of when it should be transferred.
Advantages of a Systematic Transfer Plans
Like an SIP, STP also offers an advantage. It helps in averaging the cost when you find it difficult to time the market. It may help you to buy at a lower net asset value. The other advantage is that it helps to rebalance your portfolio. For example, you can allocate more to debt and less to equity when the markets are high. On the other hand you can add more to equity and less to debts when the markets are low.
Thus Systematic Transfer plans allow you to switch which is a big advantage.
How An STP Works?
You have to do things at the very outset. One is that you have to choose the fund that you exit and choose a fund that you want to enter. The instructions are then passed onto the mutual fund house accordingly.
For example, you may want to move money from a money market scheme to an equity scheme and vice versa.
Remember, before effecting a change, do look for the exit load charges. You may not be able to time the markets and may need professional advise sometimes.
There are various types of Systematic Transfer plans. In a fixed STP you may take out a fixed sum every month. On the other hand in capital appreciation STP you may withdraw the same after you have made adequate money, irrespective of the time. In a Flexi STP you may choose a variable amount that can be transferred.
As mentioned earlier it is important to take advise on the timing of your switch. Do not switch randomly unless you have knowledge. Also, as indicated earlier do not forget that there could be exit loads. Do remember to check for the same.