Mutual fund investment can grow your money in the long run. Most begin with Systematic Investment Plans (SIPs), where you invest a fixed amount regularly. But if you unexpectedly receive a lot of money—such as from an inheritance or a bonus—you may ask yourself: invest it all now (lump sum) or space it out? That’s where a Systematic Transfer Plan (STP) enters the picture.
An STP allows you to transfer money from one fund (most likely a debt fund) to another (most likely an equity fund) in periodic instalments. In the following, we will examine five reasons why STP is superior to investing a lump sum in equity funds directly.
What Is an STP?
A Systematic Transfer Plan (STP) allows you to transfer a specific sum from one mutual fund scheme to another at a fixed interval. Investors typically take a debt fund as the source (since it is safe) and an equity fund as the destination (for higher returns). When you create an STP:
- You choose a debt fund (such as a liquid or short-term debt fund).
- You select an equity fund (or balanced fund).
- You select a sum and frequency (e.g., ₹50,000 per month for 1 year).
- The fund house offloads part of your debt fund units and invests that amount in your selected equity fund every month.
That way, your lump sum remains in a debt fund—with higher returns than a savings account—while gradually shifting into equity.
5 Reasons Why STP is Better Than Investing Lump Sum
STP is a much better option than directly investing lump sum amounts in mutual funds. Let us see a comparison of STP vs Lumpsum here-
1. Reduces Market Risk
Investing a large sum of money at once in the equity market can be dangerous. If markets are peaked on the day you’re investing, a plummet can eat into your returns right away.
With an STP, you invest in installments spread out over weeks or months. This method prevents you from risking money just when the market is about to decline. You purchase over a period at various market levels, which smooths out the fluctuations.
Key Point: STP reduces the risk of “poor timing” in entering equity markets.
2. Earns Better Interim Returns
When your lump amount is in a debt fund while waiting to switch to equity, it continues to fetch good returns—a very high rate compared to a savings bank account.
- Liquid and ultra-short-term debt funds often return more than 6–7% per year.
- These funds have zero exit load, so you can transfer money monthly without extra fees.
This implies your money earns more while waiting to get into equity markets.
3. Offers Flexibility
STPs are extremely flexible. You can:
- Speed up the transfers if you feel market conditions are right.
- Slow down or pause transfers if you need cash or if markets look overvalued.
- Stop the STP anytime without penalty.
You can seek assistance from a financial adviser to determine whether to make changes or stop your STP based on your objectives and market performance.
4. Helps with Rupee Cost Averaging
Similar to SIPs, STPs also benefit from rupee cost averaging. Because markets fluctuate every day, investing a lump sum periodically means you purchase more units when they are cheaper and fewer when they are more expensive. Over time, this method helps reduce your average cost of purchasing per unit and increases overall returns.
5. Automatically Rebalances Your Portfolio
An STP can also be used as a rebalancing tool. For instance:
- If your equity positions become too big, you can create an STP from equity to a debt fund to cut down on exposure.
- If your debt component turns out to be too large, an STP from debt to equity can increase your equity exposure.
An STP can also be used as a rebalancing tool. For instance:
STP vs. Lump Sum: A Quick Comparison
| Feature | Lump Sum Investment | STP Investment |
|---|---|---|
| Market Timing | High risk of wrong timing | Spreads risk over time |
| Interim Returns | Money sits in bank (0.5–1% p.a.) | Debt fund returns (6–7% p.a.) |
| Flexibility | Hard to adjust once done | Can speed up, slow down, pause |
| Cost Averaging | No | Yes |
| Rebalancing | Manual, requires effort | Built-in, automatic |
Conclusion
For one-time surplus investors, an STP provides the best of both worlds: increased interim returns in debt funds, along with incremental entry into equity markets. This strategy minimizes market timing risk, enjoys rupee cost averaging, and offers the freedom to revise or terminate at will. Although lump sum investing may suit rising markets, STP is a cautious and measured method for investing large sums, particularly if the market environment is ambiguous.
Tip: Keep in mind, you can only do an STP between funds of the same fund house (AMC). Select an AMC with a large number of debt and equity funds to benefit most.
Frequently Asked Questions (FAQ)
Can I start an STP anytime?
You can begin an STP as soon as you invest in the debt fund. Just contact your fund house or use your online account.
Is there a minimum period for STP?
Most AMCs allow a minimum of three to six months, but you can choose longer periods based on your lump sum and goals.
Are there any tax implications?
Transfers from debt to equity funds are treated as a redemption in the debt fund. If held under 36 months, capital gains may be taxed at your income tax slab. For equity funds held over 12 months, long-term capital gains up to ₹1 lakh per year are tax-free; gains above that are taxed at 10%.
Can I do STP from any type of debt fund?
Yes, but liquid, ultra-short-term, or short-term debt funds are most popular because they offer stability, higher returns than a savings account, and zero exit load.
