In the world of investments, it’s crucial to understand different financial tools to ease your investment journey. One such tool that has become popular recently is the Systematic Transfer Plan, or STP. It allows you to transfer your investment from one fund to another systematically.
In this article, we will discuss the intricacies of STP, including its meaning, types, features, benefits, ideal investors, and crucial considerations before opting for an STP.
What Is STP?
A Systematic Transfer Plan (STP) makes it easy for investors to move their money from one scheme to another regularly and effortlessly. This periodic transfer allows investors to seize opportunities when market conditions are favourable and shield their investments during turbulent times.
At its core, STP involves systematically moving money from one mutual fund scheme to another. These transfers can be made at regular intervals, such as monthly or quarterly, thus enabling investors to maintain a balance between their short-term and long-term financial goals.
How Does a Systematic Transfer Plan Work?
Let’s understand the workings of STP with an example. Suppose you want to transfer ₹2 lakh from your debt to equity funds over a period of 20 quarters.
To invest ₹2 lakh in an equity fund using a Systematic Transfer Plan (STP), here are the steps:
- Choose a Fund: Start by selecting your debt fund as the source of your investment.
- Decide Transfer Amount: Determine how much money you want to transfer regularly, whether daily, weekly, monthly, or quarterly. Let’s say you decide to transfer ₹10,000 every quarter.
- Duration: With this transfer amount, it would take 20 quarters or 60 months to complete your ₹2 lakh investment.
Types of Systematic Transfer Plans
STPs come in various forms, each designed to cater to different investment objectives and risk appetites. In India, the three most common types of systematic transfer plans are flexible STP, fixed STP, and capital appreciation STP.
- Flexible STP: In this flexible STP, investors have the autonomy to decide the total funds to transfer based on their individual requirements. The choice is influenced by market conditions and the investor’s assessment of a scheme’s performance. Consequently, investors can opt to transfer a larger portion of their existing fund when they anticipate market volatility or, conversely, transfer a smaller portion when they foresee stability.
- Fixed STP: This STP, also known as value-based STP, is a straightforward way of transferring a fixed sum from one scheme to another at regular intervals. This type of STP is ideal for those who seek a steady and predictable income stream while ensuring that their capital remains invested in the market.
For example, if you have a lump-sum amount invested in a debt mutual fund, you can initiate a fixed STP to transfer a fixed amount into an equity mutual fund regularly. This way, you can enjoy the stability of debt investments while having a portion of your money exposed to the growth potential of equities.
- Capital Appreciation STP: On the other hand, Capital Appreciation STP focuses on capital appreciation and allows investors to transfer gains made in one scheme to another. This type of STP is more suitable for those who are willing to take on higher market risk in exchange for the potential for greater returns.
Suppose you have invested in an equity mutual fund and want to protect your gains while capitalising on market opportunities. In that case, a capital appreciation STP can be your go-to strategy. It allows you to transfer your profits to a debt mutual fund or any other lower-risk option, safeguarding your earnings while keeping your principal amount invested in equities.
Features of a STP
STPs have several distinctive features that set them apart from other investment strategies. Let’s explore some of the key features of a systematic transfer plan:
- Flexibility: STPs allow investors to choose the transfer amount, frequency, and mutual fund schemes involved. This flexibility empowers investors to tailor their STP to their unique financial goals and risk tolerance.
- Rupee Cost Averaging: STPs incorporate the concept of rupee cost averaging, which can be beneficial in volatile markets. By regularly transferring a fixed amount, you buy more units of a fund when its NAV (Net Asset Value) is low and fewer units when it’s high. Over time, this strategy can potentially reduce the average cost per unit of the fund.
- Automatic Execution: STPs are hassle-free and convenient, as they are automatically executed according to the predetermined frequency and amount. This automation ensures investors stay committed to their investment strategy and benefit from market opportunities without manual intervention.
Benefits of a Systematic Transfer Plan
STPs offer a range of benefits that make them a compelling investment strategy. Let’s explore these advantages:
- Risk Management: STPs provide a structured approach to managing market risk. By gradually moving funds from one scheme to another, investors can mitigate the impact of market volatility and safeguard their investments. It is an excellent tool for those who are wary of sudden market downturns.
- Capital Preservation: An STP is an ideal choice for investors who want to preserve their capital while enjoying the potential of market gains. With options like fixed STP, you can ensure a steady income stream while maintaining your initial investment.
- Rupee Cost Averaging: Rupee cost averaging, a key feature of STPs, helps investors buy more units when the market is down and fewer units when it’s up. This strategy reduces the overall average cost per unit over time and enhances the potential for long-term returns.
- Tax Efficiency: STPs offer tax benefits by allowing investors to avail of indexation benefits on capital gains when transferring funds from debt to equity schemes within the same asset management company. This can lead to substantial tax savings over the long term.
- Diversification: STPs enable investors to diversify their portfolios across various mutual fund schemes and asset classes. By transferring funds between equity and debt schemes, investors can balance risk and returns according to their financial goals.
- Long-Term Wealth Creation: For investors with a long-term perspective, STPs can be a potent tool for wealth creation. By participating in the growth potential of equities while safeguarding profits in debt schemes, investors can work towards their financial aspirations systematically.
Who Should Invest in an STP?
STPs can be an excellent choice for a wide range of investors, provided their financial goals and risk profiles align with the features and benefits of this investment strategy. Here are some scenarios where investing in an STP makes sense:
- Salaried Individuals: Salaried individuals often have a regular income stream, making it easier to commit to an STP. They can use STPs to transfer a portion of their salary into mutual funds, allowing them to grow their wealth systematically.
- Retirees: Retirees who depend on their savings for a steady income can benefit from fixed STPs. By transferring a fixed amount at regular intervals, they can ensure a reliable income source while maintaining their principal investment.
- Risk-Averse Investors: Investors who are risk-averse and prefer to safeguard their capital may find STPs appealing. It allows them to benefit from the stability of debt schemes while having a portion of their money exposed to the growth potential of equities.
- Long-Term Investors: Those with long-term investment goals can use STPs to harness the power of compounding. By transferring gains from equity schemes to debt schemes, they can protect their profits while capitalising on market opportunities.
- Tax-Conscious Investors: Investors who seek tax-efficient strategies can benefit from STPs, particularly fixed STPs. The indexation benefit on capital gains can lead to substantial tax savings, making it a tax-efficient way to grow wealth.
How To Invest in an STP?
An STP allows you to periodically transfer a particular number of units from one mutual fund scheme to another within the same mutual fund house. Transfer plans could include an STP from an equity scheme to a debt scheme or vice versa, but within the same fund house.
To invest in STP in mutual funds, take the following steps:
- Fill up your STP form and submit it at the AMC’s office. You could fill it online at the website of the fund house.
- Select the source and the destination funds i.e. the fund from which the money will be taken out and the fund to which the money will be sent, respectively.
- You can choose the timeline for this transfer process. For example, you can choose daily, weekly or monthly STPs according to their availability and your convenience.
Tax Implications of STP
STPs do have tax implications and possible exit loads on the transfer. Each and every inter-fund transfer is considered as a redemption of the mutual fund units taken from the source fund. These redemptions are taxable. The exact rate of taxation depends on whether the gains made are in the long term or the short term. Moreover, whether the gain is considered long-term or short term depends both on the number of years of investment, as well as the type of fund. For example, to be considered for long term capital gains tax, the mutual fund unit must be held for at least 1 year if it is a equity fund and at least 3 years if it is a debt fund.
Here is a quick overview of the applicable taxes on short terms capital gains (STCG) and long term capital gains (LTCG):
|15% tax on gains on mutual fund units held for >1 year.
|LTCG of up to ₹1 lakh in a financial year is tax-free. Above that, 10% taxes are charged without indexation advantage.
|Imposed on gains on fund units held for less than 3 years and the applicable rate is as per the investor’s income slab.
|20% tax with indexation benefit on gains on fund units held for more than 3 years.
In addition, the dividends received are added to the taxable income and taxed as per the income bracket of the investor.
Learn More About Taxation on Mutual Funds
STP vs SIP
|Source of money for new unit purchase
|Units get transferred from your source fund.
|The money comes from your bank account.
|STPs offer higher returns as your money is simultaneously invested in two mutual funds.
|SIPs offer less returns as the source fund is probably a bank account with less interest.
|The amount, as well as the time period of transfers, are fixed. The transfers to your destination fund will stop after that period.
|SIPs are usually open-ended with no defined time frame for investment.
|Every transfer is considered a redemption from the source fund and thus subject to taxes.
|Transfers from bank accounts not considered taxable. Taxation applicable only upon redemption of the SIP.
|STP can be done only if you are an existing mutual fund investor with the fund house.
|Anyone can start a new SIP.
Also Read More About Systematic Investment Plan (SIP)
Things To Remember When Investing With STP
While STPs offer several advantages, it’s crucial to keep certain considerations in mind to maximise their benefits and avoid common pitfalls. Here are some key things to remember when investing in an STP:
- Long-Term Goals: Avoid investing through an STP if you plan to withdraw your investment in the near future. STPs are better suited for long-term goals.
- Market Risk Awareness: Educating yourself about market risks before committing to an STP is crucial. Being informed allows you to make well-informed decisions when market conditions change.
- SEBI’s STP Requirements: Be aware that SEBI (Securities and Exchange Board of India) mandates a minimum of 6 STPs, even if the asset management company determines the investment plan. This is a regulatory requirement.
- Tax and Exit Charges: Always calculate the taxes and exit fees before transferring. Ensure your investment generates returns after accounting for these expenses rather than seeing profits eroded by taxes and fees.
- Inherent Risk: Understand that while STPs can mitigate risk, they cannot eliminate it entirely. Market fluctuations are a part of investing, even within an STP framework.
- Regulated Structure: Keep in mind that STPs are a regulated investment structure. Exiting an STP prematurely may not align with the initial objective you had in mind when entering the plan.
Systematic transfer plans are a valuable tool for investors navigating the complex world of mutual funds while balancing risk and returns. Whether you’re a salaried individual, retiree, risk-averse investor, or someone with long-term financial goals, STPs offer a structured approach to wealth creation and capital preservation.
By understanding the nuances, benefits, and considerations associated with STPs, you can make an informed decision and enjoy the rewards of a well-executed investment strategy. To start your mutual fund journey today, Open your Demat account now with Angel One. Your financial future awaits!
Is there a minimum investment requirement for STPs?
Yes, mutual funds typically have a minimum investment requirement for STPs. The minimum amount and the interval for transfers can vary from one mutual fund scheme to another, so it’s important to check the specific requirements of the scheme you are interested in.
Are there any charges associated with STPs?
Yes, there may be charges associated with STPs, including exit load and other transaction fees. It’s essential to understand the fee structure of the mutual fund schemes you choose for your STP and factor these costs into your investment decision.
Can I change my STP frequency and amount later?
Most mutual funds allow investors to change the frequency and amount of their STPs. However, certain conditions and restrictions may exist, so it’s advisable to check with your fund house for specific details on making changes to your STP.
Is it possible to stop an STP midway?
Yes, you can stop an STP at any time. Simply notify your mutual fund or asset management company, and they will halt the systematic transfers as requested. Remember that there may be certain procedures to follow, so it’s best to check with the fund house for the exact process.
How should I choose between a fixed STP and a capital appreciation STP?
Choosing between a fixed STP and a capital appreciation STP depends on your investment goals and risk tolerance. A fixed STP is more suitable if you prioritise capital preservation and a steady income stream. For those willing to take on higher market risk and seek capital appreciation, the Capital Appreciation STP is the better choice.
What is the best way to do STP?
The best way to do an STP would be by careful consideration about the future of the source and destination funds. Calculate the possible positive difference in outcome that you expect from the transfer and deduct the additional tax that you have to pay for the transaction. Then evaluate of this net amount is worth the change in risk that comes from the change in fund scheme.
What is the biggest advantage of systematic transfer plan?
The biggest advantage of an STP is that you can move to safer options during downturns and back to growth later, with a maximum exit load of 2%. It gives you a certain degree of flexibility.
What is the exit load for STP?
The maximum exit load for STPs is 2%, as per SEBI.