STP stands for “Systematic Transfer Plan”, which means, one doesn’t want to invest in one GO, but in Parts, over a Period of time. For instance, you have 10 lacs in hand and seeking investment avenues for the entire 10 lacs. Easiest way is to shortlist a fund & invest fully (i.e. entire 10 lacs). But in the current market scenario, where market is swinging every second month (since last one year);is it a wise decision to invest fully?
STP comes as a rescue, where one can make this volatility work for your own benefit. First & foremost, let’s understand, one cannot ever time the market, therefore no point acting like a cowboy, or getting ideas based on celebrity talk-shows/ articles.
Since no one can time the market and the volatility, therefore the first rule is to park the entire funds in some conservative debt fund, where one can earn the base level returns. Next rule, based on your understanding, or with guidance with your advisor (highly recommended), one should now plan monthly transfers, from the debt fund to the preferred funds. Idea is to benefit from all levels of markets, i.e. market ups & downs, and average-out the cost of purchase.
STP is similar to SIP (Systematic Investment Plan), only difference is the source of funds at the time of investment; where SIP comes out of Income (or savings), and STP comes out from Lumpsum invested, usually in a conservative debt fund.