What is Systematic Transfer Plan?

Systematic Transfer Plan (STP) is a strategy where in an investor transfers a fixed amount of money from one category of fund to another, usually from debt funds to equity funds.

Systematic Transfer Plan (STP) in a mutual fund- Is it worth it?

Systematic Transfer Plan (STP) is a variant of SIP (Systematic Investment Plan).

In SIP, the amount is debited from the investor’s bank account and invested in the mutual funds.

In STP, the lump sum amount of the investor is first invested in liquid/ debt scheme and then a pre-defined amount is transferred to a destination scheme (equity/ hybrid) at regular intervals.

investing a lump sum amount in an equity mutual fund can be risky as equity markets are volatile and returns are linked to the stock market performance

The best way to approach above uncertain market conditions is to invest in a staggered manner through systematic transfer plans (STP) or Systematic Investment Plan(SIP). This ensures averaging out of the cost by way of buying more units when prices are low and less units when prices are high. STP offers this advantage and helps to keep maintain balance of risk and return. It also ensures the average cost of investment, is always lower than the current market price.

Thus, STP is suitable for investors with a lump sum of money in hand who want to invest in equity funds during peak equity market conditions. It serves as a good platform to earn relatively higher returns than a bank account.

More so, STP is ideal for investors who want to rebalance their asset allocation gradually. Particularly, people in the retirement age group can consider STP to transfer their accumulated corpus from risky assets (equity) to relatively safer assets (debt or liquid fund).

How does STP work?

For example, if one has Rs 50,000 to invest in equities, he can put the entire amount in a liquid fund  and go for a monthly SIP of Rs 5,000 in an equity plan through an STP.

The frequency of STP Can be Weekly, monthly or Quarterly. However, the suggested option is weekly to tide over volatile markets.

Mentioned below are a few important points with regard to the working of an STP:

Source and Target Scheme

In STP, the scheme that is considered for lump sum investment is called the `source scheme’ or `transferor scheme’, and the scheme to which the amount is transferred is called `destination scheme’ or `target scheme’ or `transferee scheme ‘.

Many AMCs allow an investor to choose any open-ended funds, including equity, hybrid and debt funds (except ELSS when lock-in and close-ended funds) as source scheme.

The target scheme may be one or many that one can choose from the same AMC.

Entry and Exit Load          

There is no entry load while entering into the fund.

Exit load varies from fund to fund depending upon the period of investment subject to a maximum of 2%.  For instance, most of equity funds charge an exit load of one per cent if the units are sold within one year from the date of allotment.

Investors should be aware about the applicable exit load period. Any transfer is treated as sale and exit load is charged if sold within the exit load period.

It is thus prudent to consider liquid fund or ultra short-term fund as the source scheme as it does not carry any exit load.

Tax

Every STP results in sale of one fund and purchase of another fund. Therefore, the transfer from fund A to Fund B results in Short term capital gains tax in fund A. HOwever, the capital gains tax implication is not very high and override the benefits of ruppee cost averaging in the marketspace.

Types of STP:

  • Fixed STP – In this type of Systematic Transfer Plan the transferable amount will be fixed and predetermined by the investor at the time of investment.
  • Capital Appreciation – Here, the capital appreciated (profit part) gets transferred to the target fund and the capital part remains safe.
  • Flexi STP – In Flexi STP, the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.

If the NAV of the target fund falls investment can be increased to take benefit of falling prices and if the market moves up the minimum amount of transfer is invested to take advantage of increasing prices.

 

What are the benefits of STP?

  1. Consistent returns – Returns in STP are consistent as money invested in debt fund earns interest till the time it is transferred to an equity fund.
  2. Rebalancing portfolio – An investor’s portfolio should be balanced between equity and debt. STP helps in rebalancing the portfolio by reallocating investments from debt to equity or vice versa. If investment in debt increases money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund.
  3. Averaging of Cost – STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price.

Is it possible to set up a Systematic Transfer Plan (STP) from a non-performing scheme of one fund house to another highly-rated scheme of another fund house?

An investor cannot start a Systematic Transfer Plan (STP) from one fund house and transfer the same to another fund house.  An STP helps investors to transfer money from one scheme to another, but in the same fund house at periodic intervals.

Debalina Roy Chowdhury

Dilzer Consultants

Sources :

http://tips.thinkrupee.com/articles/systematic-transfer-plan-stp.php

http://economictimes.indiatimes.com/markets/stocks/news/what-is-a-systematic-transfer-plan/articleshow/58509430.cms

http://premium.thehindubusinessline.com/portfolio/beyond-stocks/systematic-transfers-in-mutual-funds/article9745352.ece

https://www.principalindia.com/knowledge_centre/systematic-transfer-plan.aspxs