A Mutual Fund tool that allows investor to periodically transfer a certain amount from one scheme to another scheme at a predefined frequency.
Systematic Transfer Plan or STP is a method in which an investor transfers a defined amount of money from the Source scheme to the Target scheme (usually from a debt fund to an equity fund).
It is a mutual fund investment strategy. An investor who uses the Systematic Transfer Plan (STP) technique of investing transfers a set amount of money from one fund type to another at a set interval, typically from a debt fund to an equity fund.
STP is a useful strategy in mutual funds for averaging your investments over time. The decision to undertake a STP or lump-sum is based on three factors:
1, The investor's current equity allocation
2. Risk profile
3. Market outlook
A Systematic Transfer Plan (STP) allows you to invest a lump sum amount in one scheme and then transfer a pre-determined amount from that scheme into another scheme on a pre-determined date. STPs are a sensible solution for long-term risk management because they provide the convenience of systematic, automatic, and periodic transfers without the need for additional action.
How does a STP work?
An STP is a method of transferring money from one mutual fund to another. The first fund's balance is reduced, while the second fund's balance is boosted. This occurs automatically, and you are not required to do anything to receive the funds.
The investor must choose a fund from which the transfer should be made and a fund to which it should be made. Depending on the STP selected and the options available with the AMC, transfers can be made daily, weekly, monthly, or quarterly.
Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP), two other common mutual fund investing approaches, are closely related. A SIP invests a predetermined amount in a mutual fund at predetermined intervals, while an SWP withdraws a predetermined amount from a mutual fund at predetermined intervals.
Furthermore, investors might deposit a flat sum in an equities fund and expect a regular withdrawal. The systematic withdrawal plan SWP is another way to withdraw money from a mutual fund scheme. SWP is the polar opposite of SIP. After depositing a lump sum payment in a mutual fund plan, investors can withdraw a specified amount of money at regular periods. For many people, this withdrawal serves as a reliable source of income (E.g., senior citizens)
STP can also be useful while planning some of your significant financial goals, such as buying your dream home, getting married, children's schooling, marriage, retirement, and so on, because it allows you to progressively transition from equity to debt as you come closer to your financial goals.
Features of Systematic Transfer Plan ?
Minimum Investment
STP does not need a minimum investment. However, some AMCs might have an additional requirement of minimum payment.
Load at the Entry and Exit
Six capital transfers from one mutual fund to another are necessary to apply for a STP. Once investors are free of entrance charges, SEBI permits fund companies to levy an exit charge.
Tax
Sweeping funds out of an equity or debt fund is considered as a sale and is taxed appropriately. If you are transferring money from debt/liquid funds to equity funds, any sale made before three years would be considered short-term capital gains (STCG) and will be taxed at your slab rate.
While you transfer your investments from a mutual fund scheme to another, the Income Tax Act, 1961 construes it to be sale transaction, and thus the provisions of the Act apply as well. Likewise, a Securities Transaction Tax (STT) will be levied at the time of exit i.e. from one equity oriented fund to a debt scheme, or even another equity mutual fund scheme (of the same fund house)
Disciplined
STP permits controlled fund transfers, and in most circumstances, it is possible to establish a systematic transfer plan from a debt fund to an equity fund.
Pros of a Systematic Transfer Plan
Managing your Financial Resources:
Redistributing investments between debt and equity, STP aids in portfolio rebalancing.
Cost-Averaging:
Systematic Investment Plan (SIP) characteristics are incorporated into STP (SIP). The source of investment is a major distinction between STP and SIP. Money is often transferred from a debt fund in the first situation, and from the investor's bank account in the second. STP, like SIP, aids in rupee cost averaging because of its similarity to SIP.
Aiming for Increased Profitability:
In most cases, money invested in a debt fund earns interest until it is transferred to an equity fund for further growth and development. Debt funds often offer larger returns than savings accounts and are designed to provide a higher level of risk-adjusted returns.
Types of STPs
Fixed STP-Investors move a specific sum from one investment fund and transfer it to another fund. In capital appreciation STP, the investors take out the profit that they have gained on one investment and invest in another investment fund.
Flexi STP- Investors might opt to transfer a variable amount. The fixed amount would be the minimum amount and the variable amount depends on the volatility of the market.
Capital STP-Investors reinvest the complete profits generated by a fund's market appreciation in another prospective scheme with a strong development potential.
Conclusion :
Even though you must make an initial lump-sum investment, Systematic Transfer Plans are regarded safer. The key reason for this is that you have the option of transferring regular amounts from your source fund to other target funds. This is an excellent approach to not only increase your wealth but also to maximize your investment returns.
You can profit from the flexibility of shifting out to debt or equity-oriented funds at any point in the market cycle. Furthermore, your source fund is still producing returns. This means that your money is always growing and compounding.
These programmes allow you to rebalance your portfolio according to your financial objectives. When you need to attain short-term goals, you can transfer out to equity-oriented funds, and when you require long-term savings, you can move out to debt.
STP is a very effective approach for reducing market risk. However, it is important to realize that it does not eliminate the danger of market losses. Simultaneously, reducing risk exposure means that the investor may miss out on possible gains when the market performs very well. In the long run, however, this method can be utilized to limit losses and boost portfolio returns.
Want to know more about STP vs SIP- Read here -
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