Here’s all you need to know about Systematic Transfer Plan (STPs):
Markets have always been volatile owing to a dynamic and growing economy. Sometimes the debt markets look promising. At other times, the equities keep throwing opportunities. Additionally, your investment needs change according to your age and life goals.
So, whether it’s stormy or sunny outside, you need to ensure that your portfolio is always alive and kicking.
You can keep the party going with the Systematic Transfer Plan (STP).
Systematic Transfer Plan (STP) is a kind of fraternal twin of Systematic Investment Plan (SIP). It enables you to take advantage of the market volatility. It involves transferring a fixed or variable sum from one asset account to another asset account. Such transfers usually occur between a debt fund (transferor scheme) and an equity fund (transferee scheme) within the same fund house.
STPs are available on daily, weekly, fortnightly, monthly and quarterly basis depending upon the fund house. You may specify the date on which STP should be conducted. If you don’t mention a specific date and frequency, then the AMC would perform STP on the default dates. Both for redemption and investment, NAV of the STP date would be applicable.
The direction of transfer will depend on your investment preferences. Consider a situation that the markets are over-valued. You are apprehensive about investing in equities. So, you go by the STP route. It would entail systematic redemption of units of liquid fund and purchase of units of equity fund. There may be consecutive dips and gains during the investment horizon. But overall you would benefit from averaging of your returns.
On the contrary, imagine that you are holding units of an equity fund worth Rs 10 lakh. Now, as your ship approaches retirement, you want to move away from the turbulent sea waters. In such a scenario too, STP would be an ideal option. You may get the investment transferred from equity funds to debt funds systematically.
In this way, you can explore the growth potential of different asset classes of the mutual funds.
Types of Systematic Transfer Plan (STPs)
STPs can be done by one of the two modes which are as follows:
In this kind of STP, you would be transferring a fixed amount of money from one asset account to another. It can be looked upon transferring a fixed sum say Rs 10000 every month from your debt account to equity account. The fund house would redeem units equivalent to Rs 10000 from your debt account and purchase similar units of equity fund from that money.
This type of STP involves transferring only the capital appreciation from one asset account to another. Suppose your investment in Rs 500000 in a debt account becomes Rs 520000 after some time. You transfer the capital appreciation of Rs 20000 into an equity account.
Factors affecting Systematic Transfer Plan (STPs)
Before going for redemption in debt funds, you need to check two crucial things i.e. tax incidence and exit loads. While STP is done, it involves the sale of units of debt funds and purchase of equity funds with that money. If a redemption of debt fund units occurs before 3 years, it attracts Short-term capital gains. Short-term capital gains are taxed as per your income slab. If you belong to 30% tax bracket, then STPs may be unsuitable for relatively smaller fund transfers.
Conversely, STPs conducted after 3 years of holding will be taxed at the rate of 20%. Apart from that huge exit loads may eat into your fund returns. In addition to duration of fund holding, you may consider the minimum lock-in period of your mutual fund scheme.
Hence, the duration of your holdings and exit loads weigh heavily on your STP decision.
Also read: SIP vs Lumpsum Investment
Lumpsum vs. STP
STP relates to staggered transfer from one fund to another. On the other hand, lump sum means putting big stakes into a particular fund. Now whether you should go in a staggered manner or the lump sum way, depends on the market conditions.
In the case of a fairly valued market, you may go for lump sum investment. It will help you to ride the growth momentum of the equity markets. If you do STP in such a market condition, you tend to lose on your returns vis-à-vis your peers.
STP of smaller amounts is ideal when the market has reached its nadir. So, as the markets start picking up, you may gain from the volatility. It also helps to hedge the risk inherent in equity investing as you would have a buffer by way of debt funds. There is one more angle to this story. When markets are at their peak, you may initiate STP from equity to debt funds. It will not only help you in booking profits but also minimise the risks.
The investment horizon of your financial goal would also determine the STP decision. It can be thought of as how far or near are you from your goal. So, initially, you invested a lump sum in equity funds at the beginning of your goal. As you approach near to your goal, you may go for an STP. It would be like transferring money from equity fund to debt fund.
The rationale behind such a move is risk management. You would not want your fund returns to go southwards as you are closer to the goal. STPs, in fact, would cushion you from losses just in case the markets crash suddenly in the midst.
Systematic Transfer Plan (STPs) is a balanced way to realise the potential of your money. This strategy mainly finds application when you are uncertain about the direction in which the markets may proceed. But at the same time, you also don’t want to lose the opportunity of making money upon market correction.
STP ultimately cuts down the risk inherent in lump sum investing. It will help you to earn decent returns in a volatile market provided you take the precautions as enlisted above.
Mutual Fund investments are subject to market risk. Please consult your financial advisor before investing.