A Systematic Transfer Plan (STP) is an investment strategy that allows investors to transfer their financial resources from one mutual fund scheme to another within the same AMC, instantaneously and without any hassles. This transfer occurs periodically, enabling investors to gain market advantage by changing to securities when they offer higher returns. Thus, it safeguards the interests of an investor during market fluctuations, minimizing the damages incurred. In this article, you will explore the Systematic Transfer Plans meaning, types of Systematic Transfer Plans, Systematic Transfer Plans features and many more in detail.
What is STP in mutual funds?
A Systematic Transfer Plan (STP) allows investors to transfer a fixed amount from one mutual fund scheme to another at regular, pre-specified intervals.
Imagine a bridge between two investment pools. You set a fixed amount or number of units to be periodically transferred from a ‘source scheme’ (often a debt fund) to a ‘target scheme’ (often an equity fund). This offers several benefits:
How do systematic transfer plans work?
A systematic transfer plan or STP allows you to periodically transfer (switch) a certain amount of units from one mutual fund scheme to another mutual fund scheme of the same mutual fund house. You may consider an STP from an equity scheme to a debt scheme or vice versa depending on the market conditions.
Types of systematic transfer plans
A best systematic transfer plan can be of primarily three types:
- Flexible STP
This form of systematic transfer plan offers investors the flexibility to decide the total funds to be transferred based on their immediate requirements. Depending on market dynamics and informed predictions regarding a scheme's performance, an investor might opt to transfer a larger or smaller portion of their existing fund. The fixed amount represents the minimum transfer, while the variable amount can be influenced by market volatility or the scheme's performance. - Fixed STP
In case of a fixed systematic transfer plan, the total amount to be transferred from one mutual fund to another remains fixed, as decided by the investor. - Capital systematic transfer plans
Capital systematic transfer plans transfer the total gains made from market appreciation of a fund to another prospective scheme with a high potential for growth.
Features of a systematic transfer plan
- SEBI mandates no minimum amount of investment to invest through systematic transfer plan mutual funds. However, most asset management companies require a minimum amount of Rs. 12,000 to be eligible for this scheme.
- A minimum of six transfers of funds is mandatory for investors to apply for investment under this scheme.
- Entry load on mutual funds is not applicable, but the exit load may be charged on each transfer made depending on the exit load structure of the scheme.
- The exit load varies for each scheme, with a maximum of 2% applicable during fund redemption or transfer. Certain schemes do not impose any exit load for systematic transfer plans (STPs).
- STPs are taxed like any other mutual fund investment.
Benefits of a systematic transfer plan
There are several characteristics of a systematic transfer plan mutual funds which makes it an attractive option for investors with varying risk appetite:
- Higher returns: STPs allow you to earn higher returns on your investments by shifting to a more profitable venture during market swings. Gaining market advantage in this method maximises the profits through securities bought and sold in the capital sector.
- Stability: During times of high degree of volatility in the stock market, investors can transfer their funds via an STP into relatively safer investment schemes such as debt funds and money market instruments.
- Disciplined approach: STP enables a disciplined and planned transfer of funds between two mutual fund schemes.
- Rupee cost averaging
Rupee Cost Averaging is an investment strategy where an investor consistently invests a fixed sum into a mutual fund at regular intervals, regardless of market fluctuations. This approach averages out the purchase cost over time, helping to mitigate the impact of market volatility on investments. - Optimal balance
Optimal balance in investment refers to the ideal mix of assets that aligns with an investor’s risk tolerance, financial goals, and time horizon. Achieving this balance helps in minimising risks while maximising potential returns, ensuring a well-diversified portfolio for steady growth. - Taxability
Taxability refers to the extent to which an investment's returns are subject to taxation. Different financial products, such as mutual funds, savings accounts, or shares, have varying tax implications, which depend on factors like the holding period, income levels, and applicable tax slabs in the investor’s country.
Structure of STP
A Systematic Transfer Plan (STP) offers unique benefits, distinguishing it from SIPs and lump sum investments in specific scenarios. Unlike lump sum investments, which involve deploying large amounts at once, STPs ensure a gradual transfer from low-risk funds to higher-yield options, reducing the risk associated with market timing.
While SIPs involve consistent investments of fixed amounts, STPs provide the flexibility to transfer funds based on market conditions. This adaptability is particularly advantageous during volatile markets, allowing investors to benefit from market fluctuations strategically.
STPs also enable investors to allocate funds systematically, alleviating the stress of making large, one-time investment decisions. They serve as an effective tool for balancing risk management and wealth creation, offering a strategic approach to navigating an active investment landscape.
Method to start a Systematic Transfer Plan
There are two ways to set up an STP as follows:
- Offline: Fill out a Systematic Transfer Plan form and submit it to the physical office of the relevant mutual fund house (Asset Management Company).
- Online: Nirmal Bang offers a user-friendly digital platform for a hassle-free STP setup.
How to set up STPs?
To set up an STP, first, you will need to make a lumpsum investment in a low-risk mutual fund, such as an overnight, liquid, or money market fund. For the uninitiated, these are safer and less volatile schemes than equity funds.
After this, set up a plan to transfer a fixed amount of money from this low-risk fund to an equity fund at regular intervals (weekly, monthly, or quarterly). This shift helps in spreading out your investments by allowing you to invest funds over a period instead of investing in one go. Moreover, STP reduces the risk of investing at a peak and then seeing a drop in value. By keeping money in a liquid fund, you can also yield better returns than a regular savings account.
However, moving money from one fund to another can trigger capital gains tax depending on the holding period and the type of fund. Additionally, some debt funds charge an exit load when you withdraw money before a certain period.
Several prominent finance experts and industry veterans have recommended using liquid funds to park excess money and then gradually transfer it to equity funds to match long-term investment plans. Also, their statements often highlight that STPs:
- Average the cost of equity investments
and - Promote disciplined investing since the money is already allocated for investment purposes.
STP Requirements
Regardless of the method, you will need to specify:
- Transfer amount: The fixed amount you wish to transfer regularly.
- Transfer date: The specific date each month for the transfer to occur.
- Investment duration: The total period for the STP to be in effect (e.g., 2 years).
Example: An STP of Rs. 10,000 on the 16th of every month for 2 years.
Who should opt for systematic transfer plan?
Systematic transfer plans are ideal for individuals who have limited resources but want to generate high returns by investing in the stock market. It is also suitable for those who want to reinvest their money in safer securities like debt instruments.
- Fewer resources, higher returns: STP is an ideal investment strategy for individuals with limited financial resources looking to earn high returns by investing in the stock market.
- Risk mitigation: STP suits investors who are cautious about market instability and prefer investing in safer debt securities during market fluctuations.
- Risk-averse investors: This strategy often attracts investors who prefer stability and want to avoid market volatility. That is because STPs allow them to gradually invest in equities while keeping most of their money in safer funds, such as liquid and money market funds.
- Long investment horizon: STP is the perfect strategy for investors with a long-term perspective. Following it, they can benefit from potential stock market growth over time while having the option to shift to safer investments when needed.
- Diversification: This investment strategy is useful for investors looking to balance their investment portfolios. That is because STPs reduce risk by spreading investments between equities and debt.
- Financial goal planning: STP is beneficial for investors with specific financial goals. It allows them to transfer funds systematically to reach their milestones. Such systematic transfers also help in making investment strategies more goal-oriented.
- Disciplined approach: STPs are for disciplined investors who can follow a structured investment plan. They require regular transfer of investments from liquid funds to equity funds, which requires a planned approach.
Tax treatment of Systematic Transfer Plan
| Source Scheme | Holding period | Type of gain | Tax rate |
| Equity funds | Less than 1 year | STCG | 15% |
| Equity funds | 1 year or more | LTCG | 10% without indexation (up to Rs. 1 lakh exempt) |
| Other funds (Debt, Gold etc.) | Less than 3 years | STCG | As per investor's income tax slab rate |
| Other funds (Debt, Gold etc.) | 3 years or more | LTCG | 20% with indexation |
SIPs vs STPs - How do they compare?
A systematic investment plan (SIP) is an investment method where you invest a fixed amount of money at regular intervals in a mutual fund. It is worth mentioning that there are no taxes on the amount you invest through SIPs. However, capital gains tax is applied when you redeem (sell) your investment.
On the other hand, a systematic transfer plan (STP) involves transferring investments from one mutual fund scheme to another. Every time you transfer money via an STP, it is considered a redemption (withdrawal) from the source fund and capital gains tax is applied to these redemptions.
To understand this better, let’s look at some major differences between SIPs and STPs:
Basis of comparison |
SIP |
STP |
Nature of plan |
It is a periodic investment made at regular intervals |
It is a transfer of funds from a particular mutual fund scheme to another |
Process |
Through SIPs, an individual can periodically invest a fixed amount in a mutual fund scheme. |
Through STP, an individual can periodically transfer money between different mutual fund schemes operating within the same AMC. |
Tax implications |
There are no taxes on the regular amounts invested via SIPs. However, capital gains tax is applied when the investment is redeemed. |
Each transfer incurs a tax because the amount moved to the target fund is treated as a redemption from the source fund. |
Things to consider before investing in a systematic transfer plan
- STPs are better suited for medium to long-term investments. They are usually not ideal for short-term financial goals.
- It is important to be aware of the risks involved in the market before starting an STP. Always stay informed about the latest market trends to make well-informed decisions, especially during significant market shifts.
- Be aware that the Securities and Exchange Board of India (SEBI) requires a minimum of six STP transactions. Hence, even if your Asset Management Company (AMC) sets up the investment plan, you must know this requirement so that you can align your expectations with the guidelines.
- Always calculate the taxes and exit fees associated with each transfer. Ensure that the profits you make from the STP exceed these charges.
- Understand that while STPs can help manage risk, they do not eliminate it entirely. Some level of risk will always be present.
- It is worth mentioning that STPs are regulated plans. Hence, if you decide to stop the STP midway, it might reduce its effectiveness and disrupt your investment strategy.
Conclusion
In conclusion, systematic transfer plans are an excellent way for investors with varying risk appetite to invest their money in mutual funds. They offer several benefits such as higher returns, stability, disciplined approach, and taxation benefits. By choosing an appropriate type of STP and following a planned approach towards investing, investors can maximize their profits while minimizing risks.
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