Hello Readers!

Well, you must have heard about SIP (Systematic Investment Plan) in mutual funds, maybe many of you must be investing in mutual funds via SIP. Through our previous blog also, we described the concepts of SIP and how beneficial it is to investors of mutual funds.

Do you know there is one more interesting term in mutual funds, somewhat similar to SIP, that you must not be aware of and that is STP (Systematic Transfer Plan)? Today through our blog we are going to discuss what is STP, what are its benefits, types of STPs and many more things. 

Read our blog and get to know everything about STP (Systematic Transfer Plan).

WHAT IS STP (SYSTEMATIC TRANSFER PLAN)? 

If you remember about SIP, then you must be knowing that SIP is the transfer of a fixed amount from savings account to a mutual fund plan, periodically. Similarly, STP or Systematic Transfer Plan is the transfer of money, but from one mutual fund to another. 

STP is basically designed to reduce risks from investor's investment and balance returns over a specific term. When investors opt for STP, AMC (Asset Management Company) permits them to put a lump sum in one fund, and transfer a fixed amount to another scheme regularly, here the former fund is called source scheme or transferor scheme, and the latter is called a target scheme or destination scheme.

HOW TO START AN STP (SYSTEMATIC TRANSFER PLAN)?

Well, in the view of STP’s, previously fund houses allowed only debt fund to an equity fund transfer that too within the same company, but now investors can transfer from an equity fund of one AMC to that of another.

Suppose an investor wants to invest Rs 1 lakh in an equity fund, but at the same time, he is also afraid of market risks, then it will be best for him to do the STP. In STP, he will first select either an ultra-short-term fund or a liquid fund for his investment, then he will decide a fixed amount that he wants to transfer daily, weekly, monthly, or quarterly, from his liquid fund to any equity fund. Suppose, he decides to invest Rs 25000, every three months, then it will take him four quarters that are 12 months to complete the investment.  

WHICH ONE IS BETTER TO INVEST LUMP-SUM- SIP or STP?

Well, STP and SIP are considered similar to each other, to some extent, but it is advisable to investors, to opt for STP if they want to invest lump-sum. This is because, in SIP, you invest or better say save your lump-sum amount in savings account, where you get a return as per 4% rate of return, but if you invest your lump-sum through STP, you invest it in a debt fund which gives a return, as per 7-9% rate of return, which is far better than savings return. So, it would be better to invest the lump sum in a low-risk debt fund and then schedule an STP to equity funds of your choice.

FEATURES OF STP (SYSTEMATIC TRANSFER PLAN)

Well Like SIP, STP does come with many features, some of which are listed here:

  1. Minimum Investment: Well, like SIP, there is no standard minimum amount fixed for investing in source funds in STP, however, there are some AMC’s that insist on a minimum investment amount of Rs 12000 in their systematic transfer plans.
  2. Entry and Exit loads: There is no charge like entry load in STP, an investor to apply STP, they need to do a minimum of six capital transfers from one mutual fund to another. As per SEBI (Security Exchange Board of India) guidelines, fund houses charge exit load up to 2% in STP. The AMC calculates exit load based on investment tenure and fund type.
  3.  Taxation on STP’s: In STP, every transfer from one fund to another fund, is treated as redemption and new investment, and we know the redemption is taxable. If investors do STP from their debt fund, money transferred within the first three years from a debt fund is subject to short-term capital gains tax (STCG) and is taxed accordingly.

BENEFITS OF STP (SYSTEMATIC TRANSFER PLAN)

  1. Managing Risks: Well, risks in mutual funds, this very thing still hinders many people, from joining the mutual fund investment, but investing through STP in mutual funds, helps its investors to move from the riskier asset class to less risky asset class. Understand it through an example, suppose an investor started his SIP for 30 years into an equity fund towards retirement planning. When he approaches towards retirement, he started an STP and instructed his fund house to transfer a fixed amount from the equity fund to a debt fund, in this way he moved all the accumulated corpus to a safe fund, till he attained his retirement, without any loss.
  2. Rupee Cost Averaging: Similar to SIP, STP also averages out the cost of investment by buying lesser units at higher NAV and more units at a lower price. As your money gets transferred from one fund to another, the fund manager would keep purchasing additional units systematically.
  3. Scope for Higher returns: When investors invest through STP’s, they first invest a lump-sum in a debt fund like a liquid fund. Liquid funds are known to yield higher returns in the range of 7%-9%, which is obviously more than the returns earned in saving accounts that are a mere 4%. In this way, investors of STP tend to generate higher returns.

TYPES OF STP (SYSTEMATIC TRANSFER PLAN)

Well, there are three types of STP’s known that have been listed below:

  1. Fixed STP: In this type, the amount to be transferred periodically from one fund to another is fixed. The investor can decide on this amount as per his financial goal and apply for the same.
  2. Capital appreciation: In this type, only the appreciated capital that is gain earned is transferred from source fund to the destination fund and the capital part remains safe.
  3. Flexi STP: In this type, investors choose to transfer a varied amount from the source fund to the target fund as per their choice, generally they decide the amount to be transferred, as per the market fluctuations. For instance, if the Net Asset Value of the destination fund dips, investors increase the amount to be transferred and vice versa.

WHO SHOULD INVEST IN STP (SYSTEMATIC TRANSFER PLAN)? 

STP is the best suitable choice for those who, seek to invest a lump-sum in a mutual fund, but at the same time, also afraid of market volatility and risk, that why restricts themselves from investing the lump-sum amount, at once. For such investors, it is advised, to place their money in a liquid or debt fund, and then transfer this fund from debt fund to equity fund, periodically. When this money gets transferred to an equity fund, investors get the fixed returns from the debt funds as well as potential returns from the equity scheme.

SOME KEY POINTS TO REMEMBER BEFORE INVESTING VIA STP IN MUTUAL FUNDS

  1. Go for STP investment, only if you have a lump-sum amount, and you don’t need that money in the near future.
  2. Though the fund house decides the minimum investment, you need to make at least 6 STPs as per the SEBI guidelines.
  3. STP is one of the most reliable risk-reducing strategies an investor can adopt but remember they cannot eradicate the market risk due to its fluctuations.
  4. Always keep an eye on the underlying assets and their phases. For instance, it would be irrational to transfer capital, when the market is moving to the peak.

Basically, STP is a useful strategy to manage risks without affecting investor's returns greatly. As of now you are aware of the key features of STP, and also know about the benefits of STP, so don’t wait and plan for your STP investment in mutual funds today, where you can enjoy the benefits from both, debt as well as an equity fund.

Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.


Happy Investing!


(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).