MUTUAL FUNDS

Systematic Transfer Plan (STP)

STP means transferring money from one mutual fund plan to another.

STP is a smart strategy to stagger your investment over a specific term to reduce risks and balance returns. For instance, if you invest ‘systematically’ in equities, you can earn risk-free returns even when the markets are volatile. Here, an AMC permits you to invest a lump sum in one fund, and transfer a fixed amount to another scheme regularly. The former fund is called source scheme or transferor scheme, and the latter is referred to as the target scheme or destination scheme.

  • STP is a useful tool in mutual funds to average your investment over a specific period. To decide on whether one should do an STP or lump sum depends on three factors – an investor’s current allocation to equities, the risk profile of the investor and finally, the market view.

  • For instance, to invest Rs.1 lakh in an equity fund using STP, you may first select either an ultra short-term fund or a liquid fund. After that, decide on a fixed amount that you want to transfer daily, weekly, monthly, or quarterly. Hence, if you choose to move Rs.20,000 every three months, it will take five quarters (15 months) to complete the investment. Earlier, fund houses allowed only debt to equity fund transfer within the same company. Now, you can transfer from an equity fund of one AMC to that of another.

a. Minimum Investment

  • There is no standard minimum investment amount to invest in the source fund. However, some AMCs insist on a minimum amount of Rs.12,000 in their systematic transfer plans.

b. Entry & Exit load

  • To apply for an STP, you need to do at least six capital transfers from one mutual fund to another. While you are free from entry load, SEBI allows fund houses to charge exit load. However, the exit load cannot exceed 2%.

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c. Disciplined & Lucrative

  • Systematic Transfer Plan (STP) enables a disciplined and planned transfer of funds between two mutual fund schemes. In most cases, investors initiate an STP from a debt fund to an equity fund.

d. Taxation on STPs

  • While an STP is a good strategy, you should be aware of the tax implications and exit loads on the transfer. Every transfer from one fund to another is considered as redemption and new investment. The redemption is usually taxable. The money transferred within the first three years from a debt fund is subject to short-term capital gains tax (STCG). But even with this tax aspect, the returns earned would be higher than those in a bank account.

a. Scope for Higher Returns

  • If you opt for STP instead, you tend to generate higher returns. It is because, for an STP, you will be initially investing the lump sum in a debt fund like a liquid fund. Liquid funds are known to yield higher returns in the range of 7%-9% as compared to the mere 4% returns earned in a savings bank account.

b. Earning Steady Returns

  • The returns made via STP are pretty reliable. This is because the amount in source fund (debt fund) generates interest until you transfer the entire amount.

c. Managing Risks

  • An STP can also be used to move from a risky asset class to a less risky asset class. For instance, say, you initiated a SIP for 30 years into an equity fund for retirement planning. As you approach your retirement, you can start an STP to prevent loss of fund value. Here, you instruct the fund house to transfer a fixed amount from the equity fund to a debt fund. In this way, by the time you retire, you would have moved all the accumulated corpus to a safer haven.

d. Rupee Cost Averaging

  • Systematic Transfer Plans averages out the cost of investment by buying lesser units at higher NAV and more units at a lower price. As your money gets transferred from one fund to another, the fund manager would keep purchasing additional units systematically. Hence, you will get the benefit of rupee cost averaging, i.e. the per-unit cost of investment will reduce gradually.

e. Re-balancing Portfolio

  • Your portfolio should strike a balance between debt and equities. An STP re-balances the portfolio by moving investments from debt to equity funds or vice versa.

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