STP – Systematic Transfer Plan in Mutual Fund

What is Systematic transfer plan (STP)?

A Systematic Transfer Plan (STP) is a facility offered by mutual fund companies that allows investors to move their investments from one scheme to another within the same fund house. Typically, the transfer is done gradually from a debt or liquid fund to an equity-based fund so investors can systematically gain exposure to the market and the associated volatility. 

STP in mutual fund is most beneficial for investors with a lump sum who prefer not to invest it all at once or time the market. Instead, they can gradually shift their investment into equity, gaining exposure over time.

In this article, we explore what is systematic transfer plan, and the types and benefits of STPs.

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

- Long-term investment: A systematic transfer plan works best in the long term. They are not designed for short-term gains, and investors should manage their expectations accordingly.
 

- Exit load and taxes : While making a withdrawal from a scheme, an exit load may apply, depending on the duration of the holding. Additionally, capital gains tax may be levied, making it important to assess the tax impact before initiating an STP.
 

- Risk is not eliminated : STPs help reduce market timing risk by spreading investments over time, but they do not eliminate the risk entirely. Since funds are eventually moved to market-linked instruments, they remain subject to fluctuations associated with the market.
 

- Minimum transfers: According to the rules laid down by SEBI, investors have to commit to at least 6 instalments in order to set up their systematic transfer plan.