STP is a way through which one invests a lumpsum amount in one scheme & regularly transfers a pre-defined amount into another scheme of the same mutual fund house. In the long run, STP helps in cutting down risks to a considerable level & earning good returns. Basically, STP means transferring an investment from one asset or asset type into another asset or asset type. This transfer process happens gradually over a period of time.
Further, STP can be classified into three partsFixed STP - Here the investors take out a fixed sum from one investment to the another.
Capital Appreciation STP - Here the investors take out the profit part of the investment & invest it in another.
Flexi STP - Here, the investor has a choice to transfer a variable amount towards the investment.
Through STP, one can balance their portfolio effectively as this method allows the allocation of investments from equity to debt or vice versa. If your investment equity goes up then it can be switched from an equity to a debt fund.
Through STP one can transfer the set amount to a target equity fund while still being invested in a debt or liquid fund. So, an investor stands to gain benefit from the returns of the equity fund to which the funds are being transferred to & at the same time remain protected as a part of the investment remains in debt.
STP helps in averaging out the cost as it assists in buying units when the rates are lower & vice versa.