STP Magic: Streamlining Your Mutual Fund Moves

As an investor, you might always be on the lookout for innovative ways to tide over market fluctuations and maximise your returns. Over the years, mutual funds have emerged as one such way to generate great returns and diversify your portfolio, thanks to their professional management.

However, despite their ability to spread out your risk over a number of investments, they are not completely risk-free. Returns on mutual funds are vulnerable to market expectations, making them quite volatile. Fortunately, a Systematic Transfer Plan (STP) is an innovative way to lower your investment risk by choosing to gradually transfer your investment from one mutual fund scheme to another.

STP is a great move to streamline your mutual fund investments and protect your investments from a highly volatile market. Wondering about the meaning of STP in mutual funds and what's it all about? Here's everything you need to know about this magical approach.

What is a systematic transfer plan?

A systematic transfer plan gives investors the flexibility to transfer their funds from one mutual fund scheme to another, typically from a debt fund to an equity fund. This transfer happens gradually, allowing investors to protect themselves from market fluctuations by changing to securities when the market is on a bull run. While STP does not entirely eliminate the risk, it does help to minimise it.

STP in mutual funds is a smart strategy to balance your returns over time by streamlining fund transfer and utilisation. You can benefit from the efficient allocation of your funds in available resources as the money is automatically adjusted between the chosen funds.

That said, this feature is only available when you want to shift between MF schemes under the same asset management company – shifting between schemes of different fund houses is not allowed.

How does STP work?

Let's say you wish to invest in a profitable equity fund but are concerned about the potential loss due to market risk. Here, an AMC allows you to invest a lump sum amount in one scheme, perhaps a low-risk debt fund, and transfer a fixed amount regularly to the other equity fund. The former is known as the source or transferor scheme, and the latter is called the target or destination scheme.

The AMC will sell units from your debt fund and simultaneously invest the money in the equity fund of your choice. This way, you can systematically invest in equities to earn great returns even when the market is volatile.

Types of STP

STPs are primarily divided into three types.

- Fixed STP: In this type of plan, you can only transfer a fixed amount from one mutual fund to another.

- Flexible STP: Under this plan, you have complete flexibility in terms of the amount of funds to be transferred as and when the need arises. You can increase or decrease the amount to transfer from your existing fund depending on market fluctuations and the predicted performance of a scheme.

- Capital STP: As the name suggests, this plan involves transferring the total capital gains generated from one mutual fund to another with a high growth potential.

Features of systematic transfer plan

1. Entry and exit load

Before applying for STP, you need to do at least six capital transfers from one mutual fund to another. While there is no charge applicable to entry load, fund houses can charge an exit load of not more than 2% as per SEBI guidelines.

2. No minimum investment

There is no restriction as to the amount to be invested in the source fund.

3. Disciplined approach

STP in mutual funds helps adopt a planned and disciplined approach to transferring funds from one mutual scheme to another.

4. Taxation

The returns you gain from STP are subject to taxation since they are nothing but capital gains from the transfer of mutual funds. Every transfer is considered as redemption and subsequent new investment, where the units you redeem are taxable.

As a result, the amount transferred from a debt fund in the first three years is subject to short-term capital gains.

Benefits of a systematic transfer plan

Here are the benefits of investing in a systematic transfer plan:-

1. Earn steady and high returns

STP allows you to earn high on your returns by playing it safe during market fluctuations. With this approach, you can shift from a debt fund to a more profitable equity fund scheme during a market swing and maximise your returns.

Conversely, in a highly volatile stock market, your investment in the source funds (typically a debt fund) brings much-needed stability to your portfolio.

2. Manage risk

STP is one of the best ways to shift from a relatively risky investment to a less risky one. For instance, say you invested in an equity fund scheme when you started earning towards your retirement plan. However, with time, your risk appetite has lowered. So, as you approach retirement, you can initiate an STP to transfer a fixed amount from your source funds to a less risky debt fund regularly.

3. Rupee cost averaging

With STP, you have the benefit of rupee cost averaging, which allows you to lower the average cost of your investment gradually. Here, the fund manager will buy more units of a fund when the average price is low and sell more units as the market price increases, thus maximising your capital gains and reducing the per-unit cost of investment.

4. Portfolio rebalancing

STP aims to strike a balance between equity and debt fund investments so that there is an optimal combination of returns and risk in your portfolio.

Over to you

By opting for a systematic investment plan, you can diversify your investment portfolio, minimise risk, and maximise returns with investments in safe and risky funds simultaneously.

If you're ready to start with your mutual fund investment journey, turn to Tata Capital Moneyfy. Choose from the best mutual fund options and get professional advice to get the best out of your investment decisions. Visit the Tata Capital Moneyfy website to know more or download the Moneyfy App.