What is a systematic transfer plan (STP) in mutual fund investment?

Posted On: 07 September 2023

An investment instrument that has gained popularity among investors is the Systematic Transfer Plan (STP). STP offers a strategic approach to investing, allowing individuals to make the most of their money while managing commensurate risk. In this comprehensive guide, we will discuss what STP is, its types, benefits, and who should consider it as part of their investment strategy.

Table of contents

What is systematic transfer plan (STP)
How do systematic transfer plans work?
Types of systematic transfer plans
SIPs vs STPs - How do they compare?
Benefits of systematic transfer plan in investment
Who should invest in systematic transfer plans?
Things to Remember when Investing with a Systematic Transfer Plan
Key takeaways

What is a Systematic Transfer Plan (STP)?

A Systematic Transfer Plan, commonly known as STP, is an investment strategy employed by mutual fund investors to potentially optimize their returns and manage commensurate risk. STP operates on the simple principle of transferring funds systematically from one mutual fund scheme to another within the same asset management company (AMC). These transfers can occur at predefined intervals, typically monthly or quarterly.

The fundamental idea behind STP is to park a lumpsum amount in a debt fund or liquid fund initially and then transfer a fixed or variable amount into an equity fund over time.

This systematic approach can help investors to tap into the potential growth of equity markets while reducing the exposure to market volatility.

How do Systematic Transfer Plans work?

Here are the different aspects of an STP:

1. Selection of funds: Investors choose two funds: one as the source (e.g., a debt or liquid fund) and the other as the target (e.g., an equity or hybrid fund).

2. Transfer mechanism: The predefined amount or units are moved from the source fund to the target fund on scheduled dates (weekly, monthly, or quarterly).

3.Redemption from source fund: On the transfer date, the designated amount or units are redeemed from the source fund, which may also earn returns during the holding period.

4.Investment in target fund: The redeemed amount is invested into the target fund, where units are purchased based on the fund’s Net Asset Value (NAV) on the transfer date.

Types of systematic transfer plans

There are two main types of Systematic Transfer Plans, and investors can choose the one that aligns with their financial goals and risk appetite:

Fixed STP

In a Fixed STP, a fixed amount is transferred from the source fund (usually a debt or liquid fund) to the target fund (typically an equity fund) at regular intervals. This fixed amount ensures consistency in the transfer process, regardless of market conditions.

Capital appreciation STP

In a Capital Appreciation STP, the transfer amount is not fixed; instead, it depends on the performance of the source fund. Investors can decide on a specific return threshold, and when the source fund crosses this threshold, a portion of the gains is transferred to the target fund. This type of STP allows for greater flexibility and offers a relatively higher return potential.

SIPs vs STPs: How do they compare?

A Systematic Investment Plan (SIP) is a method of investing a fixed amount at regular intervals into a mutual fund. In contrast, a Systematic Transfer Plan (STP) involves transferring funds from one mutual fund scheme to another. Each time you move money through an STP, it is considered a redemption from the source fund, and capital gains tax is applied to those redemptions.

Here’s a comparison between SIPs and STPs:

Nature of the plan:

SIP: Periodic investments made at regular intervals.

STP: Transfers funds from one mutual fund scheme to another within the same mutual fund house.

Process:

SIP: Allows an individual to periodically invest a fixed amount in a mutual fund.

STP: Allows an individual to periodically transfer funds between different schemes within the same Asset Management Company (AMC).

Tax implications:

SIP: No taxes on the amount invested through SIPs. Capital gains tax is applied when the investment is redeemed.

STP: Each transfer is treated as a redemption from the source fund, so capital gains tax is applied on the amount moved. The tax rate depends upon the type of scheme

Benefits of systematic transfer plan in investment

Investors can enjoy several advantages when incorporating STP into their investment portfolio:

Risk management: STP allows investors to manage their exposure to market volatility. By initially investing in debt funds, they can mitigate impact on their capital invested while gradually entering the equity market.

Disciplined investing: STP promotes a disciplined approach to investing by automating the transfer process. This helps investors avoid impulsive decisions driven by market fluctuations.

Rupee-cost averaging: STP helps in rupee-cost averaging, reducing the impact of market volatility on overall returns. This strategy can prove beneficial in the long run.

Liquidity: Investors can easily redeem units from the source fund in case of any unforeseen financial requirements; thus, STP offers liquidity and flexibility.

Potential for growthSTP enables investors to participate in the potential growth of equity markets, which historically have offered relatively higher returns compared to debt instruments at a higher risk.

Who should invest in systematic transfer plans?

STP can be a valuable addition to the investment portfolio of various types of investors, including:

First-time investors: Those who are new to the world of mutual funds and want to start with a conservative approach to mitigate risk.

Conservative investors: Individuals who prioritize less volatility and are risk-averse but still wish to benefit from the growth potential of equities.

Goal-oriented investors: Investors with specific financial goals, such as buying a house, funding their child's education, or planning for retirement, can use STP to manage their investments systematically.

Investors with windfall gains: Those who have received a lumpsum amount through sources like inheritance, bonuses, or asset sales can use STP to deploy these funds efficiently into the market.

Things to remember when investing with a Systematic Transfer Plan

Understand your financial goals: Ensure that the transfer aligns with your objectives, such as moving from debt funds to equity funds for long-term growth or vice versa for stability.
Choose compatible funds: Select a source fund with low volatility (like a liquid or debt fund) and a target fund that matches your risk profile and investment horizon.
Decide the transfer frequency wisely: Opt for a transfer interval (weekly, monthly, etc.) based on your market expectations and cash flow needs.
Evaluate market conditions: Use STPs during volatile or uncertain markets to reduce timing risks, especially for equity fund investments.
Consider costs and charges: Review any applicable exit loads or expense ratios for the source and target funds. Avoid excessive costs that could reduce overall returns.
Stay mindful of taxation: Be aware of the tax implications of each transfer, as the redemption from the source fund may be subject to short- or long-term capital gains tax.
Ensure fund house compatibility: STPs can only occur between funds from the same Asset Management Company (AMC). Verify options within the AMC to ensure the desired transfer.

Key takeaways

Systematic Transfer Plans (STP) in mutual fund investments offer a systematic and disciplined approach to potentially optimizing returns and managing risk. Key takeaways from this guide include:

Although choosing a Systematic Transfer Plan is favourable for investors, it's essential to consult with a financial advisor or conduct thorough research to align your STP strategy with your financial goals and risk tolerance.

STP involves transferring funds systematically from a debt or liquid fund to an equity fund within the same AMC.
There are two primary types of STP: Fixed STP and Capital Appreciation STP.
STP helps promote disciplined investing, and leverages rupee-cost averaging.
STP is suitable for first-time investors, conservative investors, goal-oriented investors, and those with windfall gains.

Conclusion

Systematic Transfer Plans (STP) provide a structured and strategic approach to investing by systematically transferring funds from a debt or liquid fund into an equity fund. This method can help investors manage risk, benefit from rupee-cost averaging, and maintain a disciplined investment approach. Suitable for various types of investors, including first-time, conservative, and goal-oriented investors, STP offers flexibility and the growth potential. It’s a valuable tool for optimizing returns while mitigating market volatility.

FAQs:

What is a Systematic Transfer Plan (STP) in a mutual fund?

An STP allows investors to periodically transfer a fixed amount from one mutual fund scheme to another, typically from a debt fund to an equity fund.

How does STP help investors manage their investments?

It enables investors to gradually move funds from less risky assets (debt) to potentially higher-return higher risk assets (equity) over time.

Are there different types of STPs, and how do they work?

Yes, there are fixed STPs, capital appreciation STPs, and more, each with its own strategy for transferring funds.

When and why should an investor consider using STP as part of their investment strategy?

Investors may use STPs when they want to maintain a balance between asset classes, especially during changing market conditions.

Is STP better than SIP?

The choice between an SIP and an STP depends on your financial goals and preferences. A Systematic Investment Plan (SIP) is suitable for regular, consistent investments in a mutual fund, while a Systematic Transfer Plan (STP) is better suited for gradually shifting funds from one scheme to another. SIP involves steady contributions, whereas STP focuses on strategic transfers based on market conditions. Choose the option that best aligns with your investment strategy and financial objectives.

Is a Systematic Transfer Plan suitable for investors?

The suitability of an STP depends upon one’s goals and risk appetite. An STP can be suitable for investors who want to mitigate risk and shift their funds from a debt fund to an equity fund in a staggered manner, thereby reducing market timing risk and spreading out the impact of volatility over time. It can also help optimise return potential by allowing the investment to get some growth potential in a debt fund before moving to an equity fund, rather than leaving that money idle in a bank account.

How does a Systematic Transfer Plan help you deal with volatility?

A Systematic Transfer Plan (STP) in mutual funds can help mitigate the impact of market volatility because it moves units from one scheme to another at regular intervals. This way, it reduces market timing risk and leverages rupee cost averaging, where more units are redeemed when prices are down and fewer when they are up.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.