STP - Systematic Transfer Plan: Meaning, Features and Benefits

One of the best things about the mutual fund industry is switching from one scheme to another in the same fund house. Not many of you may know about it, but you can take advantage of shifting to another scheme if you invest in mutual funds via Systematic Transfer Plan or STP. Read further to know about its features and how it will benefit you as an investor.

Considering the risks associated with the mutual fund sector, you should be extra careful of your investment decisions. For instance, there may be a time when you expect a mutual fund to not perform up to the mark; what would you do in such case? There is a solution for this, and that is known as the Systematic Transfer Plan (STP). It is a process that allows investors to transfer units/ switch from one scheme to another mutual scheme of the same fund house.

STP takes place on a periodic basis helping investor by changing to securities that offer high returns. The plan protects the interest of the investor by reducing the damages that may be caused by market fluctuations.

There are three types of STPs:

• Flexible: There is flexibility in terms of amount transfer, which is based on market fluctuations. If the Net Asset Value (NAV) of a fund decreases, you can increase the amount and vice-versa.

• Fixed: As the name suggests, you can transfer only a fixed amount from the source fund to the target fund.

• Capital Appreciation: Under this type, the total capital gains are transferred from one fund to another to generate high potential growth.

A Fund Manager is a professional with appropriate qualifications that must have the above capabilities. Fund managers are entrusted with the funds of a mutual fund and help with the growth of the capital while making sure they remain safe from risks of losing the capital amount.

• Entry & Exit charges: You need to do six capital transfer before you opt for STP. There is no charge on entry load; however, fund houses do impose exit load charges as per the Securities and Exchange Board of India (SEBI).

• Planned transfers: When you select STP, it helps you to build a habit of planned transfer from one mutual fund scheme to another.

• Taxation: As the transfer of amount leads to exit load charges, tax implications also come into the picture. The units you redeem from a mutual fund scheme is usually taxable.

• A risk-averse investor and want lump sum investment, but do not want to face market volatility

• Want to earn high returns through stock market investment

• Looking to reinvest in safe securities like debt funds during market instability

• Reduces risk:

  Many use the systematic transfer plan to shift from risker to less risky asset. Most investors use the plan to transfer the units from equity to debt mutual funds. For instance, if you decided to invest in an equity fund for a duration of till the time of retirement, then you can opt for STP. The STP will save from the future losses of the fund value and will transfer your fixed amount to debt fund.

• Brings Portfolio balance:

  Systematic Transfer Plans brings the balance between equity fund and debt fund so that there is an optimal combination of returns and risk. You can bring balance to your asset class by rebalancing your portfolio for target asset allocation.

• Stable & high Returns:

  If you’re looking to earn stable returns, then STP is an ideal choice. You can still earn interest amount from source fund until you transfer the amount. However, you can still earn high returns when you shift to a profitable asset class during market fluctuation.

• Rupee Cost Averaging:

  This technique allows you to invest in securities which have a low price and selling them when the market value surges. In short, the Rupee Cost Average provides capital gains on individual securities.

• As an investor, you should know market trends to start with STP

• As per SEBI, aat least six capital transfers are required to make mutual fund investment via STP

• STP cannot help you to mitigate risks; instead, it reduces the risk to some extend

• Choose to invest in STP only if you are looking to invest lumpsum amount

• The fund house decides the minimum investment amount for STP

• You should think about exit load charges and tax implications while calculating expected returns from STP