Just like how the SIP is basically the periodic transfer of money from your bank account to a mutual fund, ETF, or stock, the STP is the periodic transfer of money from one mutual fund plan to another. This helps to reduce risks and balances returns by staggering your investments in mutual funds.
If you have tried to look for modes of investment in the past, you are likely aware of the ever-reliable Systematic Investment Plans or SIPs. However, you may or may not have heard about Systematic Transfer Plans or STPs? STPs is not an investing plan that a lot of investors are aware of, and that is what we will look to cover in this article.
What is a Systematic Transfer Plan?
Just like how the SIP is basically the periodic transfer of money from your bank account to a mutual fund, ETF, or stock, the STP is the periodic transfer of money from one mutual fund plan to another. This helps to reduce risks and balances returns by staggering your investments in mutual funds.
The purpose of this plan is to enable you as an investor to change securities as and when the alternatives offer higher returns. This helps in safeguarding your interests as an investor regardless of any ups and downs in the market. Similar to the SIP, the STP offers the streamlined procedure of transfer of funds as the process of adjusting the money between the selected mutual funds is automated.
However, the biggest drawback of the STP is that this shifting of money between mutual funds can be done between the funds of a single asset management company only. Shifting between the various schemes of several asset management companies is not possible in STP.
How does a Systematic Transfer Plan work?
There are three ways in which a systematic transfer plan can work. The following ways are:-
- Flexible Systematic Transfer Plan:- Under the Flexible Systematic Transfer Plan, you as an investor can decide when and how to transfer the funds depending on various factors like volatility in the market and expected performance of the different schemes available. Depending on the factors that suit your convenience, you may choose to transfer a higher percent of your existing fund or keep a higher percent in the existing plan and the rest in a different plan.
- Fixed Systematic Transfer Plan:- Under the Fixed Systematic Transfer Plan, you as an investor cannot vary the amount the total amount that is to be transferred from one fund to another. This process is fixed, and you can change the timeline of when you would like to switch from one fund to another.
- Capital Systematic Transfer Plan:- Under the Capital Systematic Transfer Plan, your capital gains from the existing scheme will be transferred to another scheme that has a higher potential for growth as compared to your current plan.
What are the benefits of a Systematic Transfer Plan?
There are many benefits to having a systematic transfer plan as opposed to sticking to one mutual fund for a long time. These advantages include:-
- Having a balanced investment
Systematic Transfer Plan helps to keep your portfolio balanced by ensuring your investments are allotted between debt and equity as per suitable conditions. Most of these funds have been planned in such a way to maintain a balance between safer debt-based instruments and rewarding equity-based instruments and an STP keeps the balance in check. - Averaging of Cost
Similar to SIPs, even the STP helps in rupee cost averaging by changing investments as per suitable conditions at different prices. This ensures that you have not necessarily invested in a fund when it is undervalued or overvalued.The main difference between the SIP and the STP is that the funds are transferred from a bank account to a mutual fund in the latter, while the fund is transferred between multiple mutual funds of the same fund house in the latter.
- Taxability
Every single transfer under the STP will be subject to tax deductions, as long as capital gains have been achieved. The returns from these investment modes within the duration of 3 years allow short-term gains deductible at 15%. On the other hand, long-term capital gains, i.e. duration of over 3 years, are subject to tax deductions depending on the investor’s annual income.
How do I start an STP?
As we have covered, STP is a useful instrument to ensure rupee cost averaging of your funds over different mutual fund schemes. As far as the decision on whether you should do an STP or a lump sum investment depends primarily on three factors –
- your current equity allocation,
- your risk appetite,
- your view of the market.
Let’s say, for example, you have decided to invest ₹1,00,000 in STP based equity fund. It is likely that you may initially select an ultra short-term fund or a liquid fund. After that, you’ll have to fix an amount that you will be willing to transfer in an appropriate period and keep the process going until you have reached your financial goals with the STP.
Conclusion
Using a Systematic Transfer Plan (STP) for your investments is a very smart and active way to ensure you are able to earn higher returns by investing in multiple debt and equity mutual funds as per market conditions. You are able to average your costs of investments, maintain a balanced investment, and keep control of your taxes using this neat strategy.