What Is STP (Systematic Transfer Plan)?
A systematic transfer plan allows investors to shift their financial resources from one mutual fund scheme to another instantaneously and without any hassles. This transfer occurs periodically, enabling investors to gain market advantage by changing to securities when they offer higher returns. It safeguards the interests of an investor during market fluctuations, to minimize the damages incurred. The primary advantage of opting for an STP is the streamlined process of fund transfer and utilization. As the money is automatically adjusted between the selected funds, investors can benefit from the seamless and efficient allocation of the available resources. A systematic transfer plan in Mutual Funds can only shift the financial resources of an investor between various funds operated by a single asset management company.
Types of Systematic Transfer Plans
A systematic transfer plan can be of primarily three types, each serving different investment objectives and market conditions.
Flexible STP
Under this type, the total funds to be transferred are determined by investors as and when the need arises. Depending upon market volatility and calculated predictions about scheme performance, an investor may want to transfer a relatively higher share of existing fund, or vice-versa.
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. This provides predictability and helps in systematic portfolio rebalancing.
Capital STP
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. This allows investors to lock in profits while continuing to grow their capital gains.
Features of Systematic Transfer Plan
| Feature | Details | Notes |
|---|---|---|
| Minimum Investment | ā¹12,000 (most AMCs) | SEBI mandates no minimum, but AMCs set their own requirements |
| Minimum Transfers | Six transfers mandatory | As determined by SEBI for eligibility |
| Entry Load | Not applicable | No entry load charged on STP investments |
| Exit Load | Maximum 2% | Charged on each transfer made, except liquid to equity transfers |
| Transfer Scope | Same AMC only | Can only shift between funds operated by single asset management company |
Benefits of Systematic Transfer Plan
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 maximizes the profits through securities bought and sold in the capital sector.
Capital Protection
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. This allows investors to ensure safekeeping of financial resources while earning stable returns.
Rupee Cost Averaging
This method is implemented while investing in Mutual Funds via STP, allowing investors to lower their average costs incurred on investments. Rupee Cost Averaging follows the technique of investing in funds when their average price is low and selling them when their market value increases.
Portfolio Diversification
Top systematic transfer plans aim to create a portfolio with a mixture of equity and debt instruments, to provide an optimal combination of risk and returns. In the case of risk-averse investors, the transfer of funds is made to mainly debt securities, while equity instruments are meant for investors with an aptitude for risk.
Taxability of STP
Each transfer under the systematic transfer plan is subjected to tax deductions, provided capital gains are incurred. The tax treatment depends on the type of funds involved and the holding period.
| Fund Type | Holding Period | Tax Rate | Notes |
|---|---|---|---|
| Equity Funds | Less than 1 year | 15% | Short-term capital gains tax |
| Equity Funds | 1 year or more | 10% (above ā¹1 lakh) | Long-term capital gains, depends on annual income |
| Debt Funds | Less than 3 years | As per tax slab | Short-term capital gains, added to income |
| Debt Funds | 3 years or more | 20% after Indexation | Long-term capital gains with indexation benefit |
Things to Remember When Investing with STP
Long-Term Approach
A systematic transfer plan investment scheme is devised for a long-term regime, and thereby, massive returns cannot be witnessed instantaneously. Investors should be prepared for this before considering this policy.
Market Knowledge
An investor should have considerable knowledge about market trends and patterns if systematic transfer plans are chosen. Understanding the performance of market value of assets and its fluctuation mechanisms would allow investors to realize maximum yield.
Exit Load & Taxes
Exit load and tax deductions should be kept in mind while calculating expected returns from systematic transfer plans. Security of principal amount and the value of returns depends upon the performance of the respective Mutual Funds itself.
Risk Consideration
Even though investments through systematic transfer plans ensure exposure to lower market risks, it cannot be entirely eliminated. Investors should understand that market risks remain and returns are subject to fund performance.
Final Thoughts
Systematic Transfer Plan is an effective tool for investors who want to actively manage their portfolios while benefiting from automatic transfers. It's ideal for individuals with limited resources who want to generate high returns, and for those who want to reinvest money in relatively safer securities during market instability. STP helps in portfolio rebalancing, capital protection during volatility, and taking advantage of market opportunities. However, investors should remember that STP requires market knowledge, involves exit loads and taxes, and is designed for long-term investment horizons. The eligibility criteria require a minimum of six transfers among different investment schemes as determined by SEBI. With proper understanding and strategic use, STP can be a valuable addition to your investment toolkit.