Have you started planning for your retirement yet? If you intend to start planning for it in the near future, you must consider leveraging a key feature offered by mutual funds – STPs or systematic transfer plans. Read on to know how STPs can help you in retirement planning.
Table of Contents
What is a systematic transfer plan?
You can transfer your money from one mutual fund scheme to another using a systematic transfer plan. This feature can be used to gradually shift investments from one asset class to another, helping you optimise returns and manage risk. By leveraging an STP, you can take advantage of market fluctuations while safeguarding your investments, making it a useful tool for balancing between high-risk and stable securities.
What are the types of STP?
You can choose between three main types of systematic transfer plans:
- Flexible STPs: Flexible STPs can help you optimise your overall mutual fund returns in volatile market conditions. They help you transfer your funds from one mutual fund to another (based on the other fund’s performance and on market volatility). Hence, depending on your current assessment of the market conditions, you can transfer a fixed sum to another mutual fund scheme via the flexible STP option.
- Fixed STPs: In a fixed STP, a set amount is transferred from one mutual fund to another at regular intervals, such as monthly or quarterly. This amount is decided in advance, providing predictability in your investment strategy.
- Capital STPs: This option allows you to transfer the profits earned from one mutual fund scheme to another. This approach helps you move only the capital gains from a high-performing fund to a potentially higher-growth scheme, without disturbing the original invested capital.
What are the key features and benefits of an STP?
Here are the important features and benefits of choosing an STP:
- STPs help you earn higher returns: By systematically transferring funds from one mutual fund to another, such as from debt to equity, you can potentially earn higher returns by taking advantage of market conditions. This is particularly effective during market swings, as it allows you to shift to more profitable investments.
- They act as risk management tools during volatility: STPs provide stability during market fluctuations by gradually transferring funds, reducing the risk of timing the market. While they may not directly hedge against inflation, STPs can help preserve your capital in uncertain markets.
- They help you benefit from rupee-cost averaging: Similar to Systematic Investment Plans (SIPs_, STPs spread your investments over time, helping to average out the purchase cost of mutual fund units. This allows you to buy more units when prices are low and fewer when prices are high, thereby potentially enhancing returns.
- You can create a balanced, diversified portfolio by opting for an STP: The key to a balanced portfolio is a mixture of the right equity and debt instruments. You can opt for the right mix of equity and debt investments by choosing an STP.
How can you use an STP for retirement planning?
You can use an STP for retirement planning by gradually shifting your investments from high-risk equity funds to safer debt funds as you approach retirement. This helps reduce exposure to market volatility while preserving your capital.
By systematically transferring funds, an STP allows you to manage risk and maintain a balanced portfolio, ensuring a smoother transition from growth-oriented investments to more stable, income-generating assets during retirement.
In conclusion
Investing in a systematic transfer plan can help you build a significant retirement corpus by investing consistently for the long term. You can use a retirement planning calculator to know the value of your ideal retirement corpus and leverage STPs in mutual funds while investing.