Avoid lump sum investments, stagger them through STPs

Investors can stagger their equity mutual fund investments using the systematic transfer plan (STP) facility given by mutual funds. To use this system, investors can put in a lump sum amount in one scheme (typically a liquid or ultra short term fund) and transfer a pre-defined amount into another scheme, typically an equity mutual fund. The scheme that is supposed for lump sum investment is called the ‘source scheme’ or ‘transferor scheme’ and the scheme to which the amount is transferred is called the ‘destination scheme’ or ‘target scheme’ or ‘transferee scheme’. In most situations, investors put lump sum amounts into a liquid/ ultra short term fund and transfer it to an equity fund, over six months to a year.

What are Systematic Transfer Plans (STP)?

Now almost every investor is familiar with the Systematic Investment Plan (SIP). But investors don’t know what is stp. Unlike SIP, the Systematic Transfer Plan may not be a term many investors are aware of. While SIP is the transfer of money from savings to a mutual fund plan, STP means transferring money from one mutual fund to another.

STP is an intelligent strategy to stagger your investment over a particular term to decrease risks and balance returns. For instance, if you invest ‘systematically’ in equities, you can earn risk-free returns even during unstable market situations. Here, an AMC allows you to put a lump sum in one fund, and transfer a fixed amount to another scheme regularly. Make sure these belong to the same fund house. The former fund is called source scheme or transferor scheme, and the latter is called a target scheme or destination scheme.

Features of a Systematic Transfer Plan

• Minimum Investment

There is no official minimum investment amount to invest in the beginning fund. However, some AMCs require a minimum amount of Rs. 12,000 in their systematic transfer plans.

• Entry & Exit load

To apply for an STP, it is necessary to do at least six capital transfers from one mutual fund to another. While you are open from entry load, SEBI provides fund houses to charge exit load up to 2%. The AMC calculates exit load based on investment tenure and fund class.

• Disciplined & Lucrative

Systematic Transfer Plan (STP) facilitates a disciplined and planned transfer of funds between two mutual fund schemes. In most instances, investors initiate an STP from a debt fund to an equity fund.

• Taxation on STPs

While an STP is a good plan, you should be familiar with the tax implications and exit loads on the transfer. Every transfer from one fund to another is recognized as redemption and fresh investment. The redemption is normally taxable. The money transferred within the first 3 years from a debt fund is subject to short-term capital gains tax (STCG). But even with this tax perspective, the returns earned would be higher than those in a bank account.

Benefits of STP to Investors

• Scope for higher returns

If you opt for STP instead, you manage to make higher returns. It is because you will be initially investing the lump sum in a debt fund like a liquid fund. Liquid funds are known to generate higher returns in the range of 7%-9% as compared to the insignificant 4% returns earned in a savings bank account.

• Earning steady returns

The returns you earn via STP are much secure. This is because the amount in source fund (debt fund) produces interest until you transfer the whole amount.

• Managing risks

An STP can also be used to shift from a risky asset class to a less risky asset class. For instance, say, you initiated a SIP for 30 years into an equity fund towards retirement planning. As you approach your retirement, you can start an STP to prevent loss of fund value. Here, you instruct the fund house to transfer a fixed amount from the equity fund to a debt fund. In this way, by the time you retire, you would have moved all the accumulated corpus to a safer haven.

• Rupee Cost Averaging

Systematic Transfer Plans equates out the cost of investment by buying lesser units at higher NAV and more units at a lower cost. As your money gets carried from one fund to another, the fund manager would keep purchasing additional units orderly. Hence you will get the advantage of rupee-cost averaging i.e., the per-unit cost of investment will fall slowly.

• Re-balancing portfolio

Your portfolio should create a balance between debt and equities. An STP re-balances the portfolio by shifting investments from debt to equity funds or vice versa.

Types of Systematic Transfer Plans

• Fixed STP

In Fixed STP, the amount of transfer periodically is fixed. The investor can choose this amount as per his financial objective and apply for the same.

• Capital Appreciation

In this type of STP, only the capital appreciated is transferred from source fund to the destination fund and the capital part remains protected.

• Flexi STP

Flexi STP is flexible which means you can select to transfer a different amount from the source fund to the target fund. Investors generally choose the amount as per the market rate variations. For instance, if the Net Asset Value of the destination fund drops, you can increase the amount and vice versa.

What advantages does STP offer?

• The main benefit of investing in an equity fund using an STP is that till the time the money remains invested in a liquid/ultra short term fund, it serves for the investor. This money earns a return, which is generally higher than that of a savings bank account.
• Secondly, STP helps in averaging out the cost by purchasing fewer units at a higher NAV and more at a lower price. Many financial planners also use this to re-balance the portfolio.