Systematic Transfer Plan

Systematic Transfer Plan (STP)STP is a plan that enables the investors to invest a big chunk of money (in lump sum) in a mutual fund scheme and regularly transfer a fixed or variable amount from that into another scheme. Both the mutual funds should be from the same fund managing company. In essence, STP combines the features of SWP & SIP. As in case of SWP, a lump sum amount is invested in a mutual fund at a time and periodical transfers are made from existing fund to another mutual fund as opted by the investor (which is similar to SIP).

Why is Systematic Transfer Plan used?

During the times of market volatility, where markets are prone to sudden ups and downs with least time interval, possibility of losing the investment is very high. In such case, investing in the equity in one ago at one time is not safe. There comes the STP in which you can invest your money in a less risky fund (usually debt funds) while transferring a portion of it periodically to another fund (equity) balancing the risk and returns associated therein.

Example:

If you want to invest Rs 10 lakhs in an equity scheme called “Birla SL Frontline Equity Fund (G)”. But you are of the view that the market is too volatile that it might affect the equity adversely. Then, by choosing an STP, You can invest all the money in a short term well performing debt fund such as “Birla SL floating rate fund” and instruct your fund manager to periodically transfer Rs 50,000 to the former scheme.

SIP Vs STP:

Generally STP is chosen to avoid the possible exposure of your investment in equity to the high market volatility by delaying the investment in the form of systematic transfers from high paying debt funds to equity over a period of time. If you want to invest a huge chunk of your money in the equity segment, then STP is still better than putting money in bank and doing a SIP, because your money on the debt parts of STP earns higher returns than it would in a bank account.

Types of STPs:

There are 3 types of STPs as mentioned below:

1. Fixed STP:

In this, a fixed sum will be transferred to the target mutual funds.

2. Capital Appreciation STP:

Capital Appreciations in the form of profits alone is transferred from one fund to another.

3. Flexible STP:

In this, the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.

Taxation:

Generally STPs do not last for more than a year. Every transfer made from the debt fund to an equity fund is treated as redemption of debt fund and taxed in the hands of investor as short term capital gain at the rate applicable to the investor determined on the basis of his income slab. One can save a little on taxes by opting for the dividend reinvestment option in the debt fund. Under this, the mutual fund distributes all gains as dividends after paying dividend distribution tax of 28.84% and this result in zero or almost nil capital gains.

Bottom line:

STP are particularly suitable to those investors who would like to invest a large amount of money in equity funds but cannot do the same in one go given the market volatility. They can choose a short term highly liquid debt fund to invest their lump sum initially and opt for STP making an arrangement for regular transfer of certain pre-determined amount to equity funds, thus balancing the risk associated with timing and volatility.