When it comes to mutual fund investments, you may be aware of Systematic Investment Plans (SIPs) which let you invest systematically every month or week or any other pre-defined periodic manner in a mutual fund scheme. But do you know about STPs?

What is a Systematic Transfer Plan?

Systematic Transfer Plan (STP) is an investment strategy wherein you can transfer a fixed amount from the source scheme to a target scheme of the same mutual fund house. Generally, such transfers occur at periodic intervals and are instant and hassle-free. STP allows you to benefit from regular transfer of money in your choice of scheme while minimizing damage in case of adverse price movements due to market fluctuations.

Types of Systematic Transfer Plans

• Flexible STPs

  These allow you to choose the transfer amount as and when the opportunity becomes available. Based on the market situations, you may opt to transfer from a debt mutual fund to an equity scheme to benefit from potential higher returns and vice versa.

• Fixed STPs

  This option allows you to transfer a predetermined amount from one fund to another at periodic intervals. For example, Fixed STP can be used to systematically transfer funds from a liquid scheme to an equity scheme to maximize returns while ensuring adequate liquidity.

• Capital Appreciation STPs

  If you are looking to invest your capital appreciation in a mutual fund scheme providing higher returns, this is the recommended option. It allows you to stay invested in the original scheme while diversifying the returns to another fund.

• Swing STPs

  Funds are transferred from one scheme to another based on the intended value and actual value. This option allows you to determine your exposure between schemes by enabling transfer to the source fund if the actual value exceeds the intended value.

How do Systematic Transfer Plans work?

When you have lump sum money for investment and wish to invest the same in a mutual fund scheme. However, you do not wish to invest the entire amount in one go and would like to space it over a period of time, thus taking the advantage of Rupee Cost Averaging, you can avail the process of Systematic Transfer Plan.

You can start by investing your lump sum in any mutual fund scheme of your choice; and can then place an STP request specifying the amount, the date of transfer and the target mutual fund scheme. On the specified date, the specified amount would be debited from the fund into which you put your lump sum investment. The amount would then be transferred to the target fund which you had chosen.

To illustrate, suppose you have INR 10 lakhs and you wish to invest the same in Equity oriented Fund A. Then to avoid investing the whole amount in equity fund in one go, you can invest this amount in a Liquid Fund B and place an STP request wherein INR 25,000 would be transferred to Fund A on the 20th day of every month. If you invested the money on 1st January, then INR 25, 000 would be transferred from Fund B to Fund A every 20th of every month, starting from the 20th of January itself. STP will continue as long as you have specified, i.e., number of instalments or there is the money in Fund B, whichever is earlier.

Thus, under STPs, Fund B, wherein you invest originally, is called the source fund or transferor fund and Fund A, in which the amount is transferred, is called the target fund or the destination fund.

Objectives of choosing STPs

Systematic Transfer Plans can be chosen by investors in the following instances:

• When they don’t have a regular source of income from which they can create a SIP

• When they get a lump sum money in hand and want to stagger their investments over a specified period to avail the benefit of rupee-cost averaging

• When investors don’t know how to time the market and have a lump sum amount for investment

Features of Systematic Transfer Plans

• Discipline and beneficial

  STPs ensure a disciplined and planned strategy to transfer funds from one scheme to another. In most instances, investors choose an STP to transfer funds from a debt scheme to an equity scheme with the objective of maximizing returns offered by market movements.

• Entry and exit loads

  Before opting for STP, it is mandatory to execute a minimum of six transfers. While there is no entry load to initiate a STP, mutual fund houses may levy an exit load as per the Securities and Exchange Board of India (SEBI) guidelines.

Benefits of Systematic Transfer Plans

• Rupee cost averaging

  A systematic transfer plan is beneficial to average the investment cost as it allows you to buy more units at a lower price and vice versa. Rupee cost averaging invests in a scheme when the net asset value (NAV) is lower and redeems them when NAV rises thereby increasing capital gains on individual securities.

• Higher returns

  When you choose STP, there is a larger potential of generating higher returns on your investments. At the start, you may invest in a debt fund like a liquid scheme, which has the potential to offer higher return when compared to the interest received on a regular bank savings account. Additionally, STPs allows you to switch your investment to more profitable options during market swings, which maximizes the potential returns on investments.

• Stability

  When the market is highly volatile, you may switch your investments to safer schemes like a debt fund or a money market scheme. This ensures you receive a stable return on your investment while safeguarding your capital amount.

• Risk management

  STPs are also useful to switch from a risky asset class to a relatively safer option. For example, you can switch your long-term equity fund investment to debt schemes as you approach retirement to ensure your money is invested in a safer option.

• Portfolio rebalancing

  The primary objective of STPs is to create a balance between debt and equity investments within your investment portfolio. If you are risk-averse, you can opt for debt funds while opting for equity schemes if you are willing to assume a slightly higher risk.

Taxability

When you transfer funds between schemes, an exit load is applicable along with tax implications for capital gains. The redeemed units are liable to short-term or long-term capital gains tax, as applicable.

Things to remember while opting for a Systematic Transfer Plan

• STPs deliver reasonable returns when invested for the long-term and you should opt for it only if the lump sum amount will not be needed in the immediate future.

• Exit load and taxes are applicable at the time of redemption and must be considered while opting for an STP.

• Although STPs are excellent risk-reduction strategies, the risks are not completely eliminated, and market fluctuations may impact on the returns.

• To maximize the benefits of STPs, you must be disciplined and should not opt out of the STP in case of market fluctuations or price movements.

• While the AMC determines the minimum amount, you need to execute at least six transfers as per the SEBI guidelines.

To summarize, STPs are beneficial to manage risks without significant impact on your returns. Start investing today in a plan that most appropriately suits your requirements.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.