Despite being bullish over India’s long-term prospects, many investors are on the fence about investing in securities markets as they continue to wade into the highly volatile territory. Under such circumstances, rather than steering clear of the markets looking for the perfect entry point, investors can consider staggering their investments through a systematic transfer plan (STP).
So, what is a systematic transfer plan (STP)? Let’s understand in detail.
What is STP in Mutual Funds?
STP is a strategy employed for initially investing a lump sum in a mutual fund, and then regularly transferring a fixed or a variable sum of money to another scheme over a certain period. Here, the initial fund is known as the source fund, and the latter fund is called the target fund.
Generally, individuals invest in ultra-short-term debt funds or liquid funds and then stagger their investments in an equity fund, especially if they expect the markets to improve in the near term. This way, they earn the dual benefit of regular income from the debt fund and the flexibility to transfer funds directly to an equity fund.
There is a caveat to STP investing: both the source and target funds should belong to the same asset management company (AMC).
To illustrate, if an individual is willing to invest Rs. 10 lakhs via an STP but fears the markets aren’t favourable at the moment, they will first invest this amount in a liquid or debt fund. Then, this amount will be transferred periodically, say Rs. 1 lakh every quarter, to an equity scheme. In this way, the investor can transfer the entire amount to equities in 10 quarters.
What are the Features of an STP?
Some of the features of STP include:
No Minimum Investment
Per se, there is no minimum requirement for investing via STPs. However, some AMCs may demand investors to stake at least Rs. 12,000 in the source fund.
Exit Load Applicability
While STPs are not subjected to any entry loads, AMCs are free to charge an exit load of up to 2% of the investment value. Additionally, a mutual fund investor must transmit funds at least 6 times to the destination fund.
All capital transfers from the source fund to the target fund are treated as redemptions of funds, thus inviting additional tax implications for an investor. For instance, capital transfers from a debt fund within the first 3 years will be subjected to a short-term capital gains tax (STCG).
What are the Types of STPs?
There are three types of STPs depending on the amount transferred from one scheme to another. We explain them below.
In a fixed STP, a predefined amount is transferred from the transferor fund to the destination fund based on the individual’s investment goals. They can also choose the frequency of such transfers, such as daily, monthly, quarterly, or annually.
Capital Appreciation STP
Under this STP, only the capital returns generated in the source fund are transferred to the target fund, thus keeping the initial fund corpus safe. A capital appreciation STP is becoming increasingly popular among those planning for their retirement. This STP can also be utilised by those investors who, after booking profits from an equity scheme, want to transfer these gains to a debt scheme to mitigate volatility risks.
Here, Flexi means flexible. A Flexi STP enables an investor to send a variable sum of money from the source fund to the destination fund. This amount is usually decided based on market fluctuations. For example, a mutual fund investor can choose to transmit a higher sum when the net asset value (NAV) of the target fund falls in line with the ‘buy on dips’ strategy.
What are the Benefits of STP?
Now that we are aware of the various types of STP, how can investors benefit by investing through them? Let’s find out.
Steadier and Higher Returns
The whole point of investing via an STP is to continue to generate regular income while waiting for the markets to correct. As a result, investors can generate higher returns as liquid, and debt funds offer higher interest rates than an FD or savings account. Furthermore, by staggering their investments in equity based on their market reading, they can potentially make more money.
An STP enables investors to transfer funds from a debt fund to an equity fund and vice-versa. Thus, when a debt investment’s value increases, individuals can reallocate capital to equities through an STP.
Another benefit of an STP is the averaging of the total costs of investing. As an STP involves buying at lower NAV values, more units can be added to one’s portfolio, thereby bringing down the per-unit rupee cost of the investment.
STPs serve conservative investors by enabling them to move funds from a riskier asset class (like equities) to relatively safer assets. For instance, a senior citizen post-retirement can transmit funds from equity funds to liquid debt funds to conserve their capital while assuring themselves of a steady income.
Finally, an STP benefits mutual fund investors by reducing the time and effort spent on issuing multiple instructions for redeeming funds from one scheme and then moving these funds to another scheme by combining them into a single instruction. This is extremely beneficial to investors desirous of capitalising on market volatility.
The final decision on whether to opt for STP should be made based on the investor’s risk profile, market volatility, and the existing portfolio’s equity exposure. Having said that, STPs are an excellent method of investing in mutual funds for investors unwilling to invest a lump sum at a go in a choppy market. Investors can generally earn higher returns through STP as they benefit both from higher interest rates and price appreciation over the long term.