STP – Systematic Transfer Plan in Mutual Fund

What is Systematic Transfer Plan(STP)?

Short for a Systematic Transfer Plan, STP is a facility that allows you to transfer a pre-determined amount of funds from one mutual fund scheme to another at pre-defined intervals. The periodic transfer can occur between different mutual fund schemes of the same asset management company. The mutual fund STP option does not apply to the transfer of funds between plans offered by different companies.

A Systematic Transfer Plan offers many benefits, the primary of which is the opportunity to tap into lucrative market opportunities in search of higher returns. Most investors use the STP option to jump back and forth between debt and equity funds, depending on the market movements.

It is vital to note that an STP is different from a SIP. The former is a Systematic Transfer Plan that transfers funds from one scheme to another, while the latter is a Systematic Investment Plan that transfers funds from your bank account to a mutual fund scheme for the purpose of investment. These two terms are often confused and used interchangeably. However, they imply two distinct actions. 

Types of Systematic Transfer Plans?

There are three types of STP in mutual funds:

• Fixed STP: In a fixed STP, the total amount and frequency of the transfer are fixed as chosen by the investor at the beginning of the plan.

   

• Flexi STP: As the name suggests, the flexi STP option offers flexibility to the investor in regard to the transfer amount. The investor can choose a variable amount to move from the source fund to the target fund. The choice can be made based on market fluctuations. Investors usually use this option during a volatile market. If the Net Asset Value (NAV) of the target fund decreases, investors transfer more funds to get a higher number of units, and vice versa. 

   

• Capital Appreciation STP: Under this plan, the capital appreciation earned from one mutual fund scheme is transferred to another fund. The essential thing to note here is that this type of plan only moves the gains earned from market appreciation from the source fund to the destination fund, with the purpose of making higher returns.

   

  Investors can choose any of these there options based on their risk appetite, financial goals, and expertise. For instance, the flexi and capital appreciation STP options may be suitable for experienced investors who can spot emerging opportunities in the market and accordingly make the right moves. On the other hand, a fixed STP may be more suitable for novice investors who lack the know-how and experience in the market.
  

Features of Systematic Transfer Plan

Here are some features of an STP:

• Minimum Investment: Although there is no minimum investment mandated by the Securities and Exchange Board of India (SEBI), some asset management companies ask for a minimum investment of Rs 12,000.

   

• Minimum Transfer: Investors need to make a minimum of six transfers under STP.

   

• Entry and Exit Load: There is no entry load in a Systematic Transfer Plan. However, fund houses can charge a maximum of 2% as the exit load. Additionally, there is no exit load in the case of a transfer made from a liquid fund to an equity fund.

   

• Multiple Options: Investors can transfer funds from any mutual fund scheme to another as long as it is within the same asset management company. Further, investors have multiple types of STPs to choose from.

   

• Taxation: Even though you transfer funds, the transaction is considered a withdrawal/ redemption for taxation purposes and taxed according to the prevailing short and long-term capital gains taxes for debt and equity funds.  

Benefits of Systematic Transfer Plan

Here are some benefits of an STP:

• Higher Returns: A Systematic Transfer Plan can help investors earn better rewards. Investors can maximize their returns by shifting to mutual funds that offer a higher return potential and discarding the ones that are not performing optimally.

   

• Security Against Market Volatility: STPs allow investors to shift from risky mutual funds to relatively safer investment options during market volatility. This lowers risk and protects their investments.

   

• Rebalanced Portfolios: Reviewing and rebalancing the portfolio is an integral part of investing. STP is a great strategy to rebalance your portfolio and maintain the desired asset allocation between debt and equity mutual funds.

   

• Rupee Cost Averaging: A Systematic Transfer Plan allows you to buy fewer units when the price is high and higher units when the price is low, thus averaging out the cost of investment.

Things to Remember when Investing with a Systematic Transfer Plan

It is important to remember that systematic transfer plans are created for long-term gains. Therefore, investors should remember that high returns should not be expected immediately. STPs are also best suited to investors who have extensive knowledge of market patterns and trends. Staying up-to-date on the performance and market value of assets allows investors to make gainful investment decisions. When calculating your STP investment's estimated returns, consider tax deductions and exit load.
 

STPs are also excellent options for those who want to reduce risks without significantly affecting their gains. While STPs are lower-risk investments, risk can never be entirely eliminated. Additionally, as per SEBI guidelines, at least six STP investments must be made. Thus, STPs are great options for investing in a lump sum. Finally, STPs require patience and discipline. It is crucial not to opt out of the plan due to short-term market fluctuations.