What is a Systematic Transfer Plan in Mutual Funds?

Interested in making a single investment? Try investing with STP. A Systematic Transfer Plan (STP) is an arrangement in which you make a fixed investment in one mutual fund scheme. It is automatically transferred to another at predetermined intervals. STPs usually involve transferring from a relatively lower-risk mutual fund, such as a liquid or debt fund, to an equity mutual fund.

This method is particularly applicable in instances where you have substantial capital to invest yet want to reduce the impact of market fluctuations. You will not be affected by short-term fluctuations because your investments will spread overtime and average out the per-unit buying cost. The best way to understand the STP process is to view it as a transfer system, in which funds remain invested but are periodically shifted to another scheme.

How Does STP Work?

Systematic Transfer Plans function through the automatic transfer of a predefined amount from one mutual fund plan to another at specified intervals. With this, you generally allocate your lump sum amount to debt or liquid funds and regularly transfer funds into equity schemes. Through this, we can say that the money remains invested, yet it shifts towards equity over time.

For each transfer, you must redeem your units from the originating scheme and reinvest an equal value into the receiving plan. The number of units to be bought will vary depending on the NAV of the receiving fund on the transfer date. Consequently, you can buy more units during periods of low prices and fewer units during high price periods.

STPs can usually be set on a daily, weekly, monthly, or quarterly basis, depending on the fund house. The transfer occurs automatically once initiated. This makes it convenient to move funds systematically without closely monitoring market movements.

Types Of STP

Systematic Transfer Plans come in various formats, offering investors options that fit their financial objectives and economic conditions.

Fixed STP

The Fixed STP is a plan where a specified sum is transferred periodically between two funds. For instance, you can transfer ₹10,000 each month from your liquid fund into an equity fund. It is the most commonly adopted form of STP.

Capital Appreciation STP

In this form of STP, the appreciation in the originating fund is transferred to the receiving fund. The principal continues to remain invested in the originating fund. Such an approach is common among investors who prefer relatively safer funds but want to reinvest the appreciation into other investment avenues.

Flexible STP

The flexible version of STP allows you to adjust the transfer size at your discretion or based on market conditions. For example, you may opt to transfer more money if the market goes down and less if the market rises.

Benefits Of STP

There are some advantages to adopting an STP approach, particularly for those who intend to invest a large corpus but do not want to take any risks.

Reducing Market Timing Risk

Making a lump sum investment in the stock market will put you at risk because you do not know where the prices will go when markets have reached their peak. The advantage of investing through STP is that it helps ensure you will not face this kind of risk, since you won’t invest all your money at once.

Rupee Cost Averaging

With periodic investment, an investment is made at a different Net Asset Value (NAV). This leads to purchasing more units at low prices and fewer units at high prices. This results in averaging the overall investment cost.

Efficient Use Of Lump Sum Investments

You should invest your excess cash in a debt or liquid fund, followed by a systematic transfer plan (STP). By doing this, you can ensure that the extra cash earns some returns while they gradually shift some of the money into a new scheme. The money continues to be invested.

Gradual Asset Allocation

The strength of STP is that it facilitates disciplined investing through automated transfers between schemes. It comes in handy, especially when the aim is to steadily build exposure to equities or rebalance the portfolio. After setting it up, the transfers happen automatically.

Is STP Taxable In Mutual Funds?

STP transactions are taxable since each transfer involves a sale from the source mutual fund and purchase of the target mutual fund. The sale of units from the source scheme may be subject to capital gains tax if the mutual fund falls under specific criteria.

• 20% tax is levied in case of Short-Term Capital Gains (STCG), which applies for an investment period of less than one year

• 12.5% tax is levied beyond ₹1.25 lakh worth of gains in case of Long-Term Capital Gains (LTCG). It applies when securities are held for more than one year.

However, when the transfer is from a debt fund, the returns will be taxable under the capital gains rules for debt securities. Under the latest tax regime, all gains from debt funds are added to income and taxed at the individual's applicable slab rate.

Who Should Use STP?

The Systematic Transfer Plan is a useful strategy for individuals who have a lump-sum amount to invest but do not wish to invest in equity at once. Rather than risking your entire investment in equity by subjecting yourself to market fluctuations, you can keep your money in a relatively safe bond or liquid fund and systematically transfer it to an equity fund.

This strategy might also appeal to those who are wary of market volatility but would like to participate in future growth. With the help of STP, you can slowly build equity and thus adopt a cautious approach without investing in a volatile market in one go.

Sources

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