What is Systematic Transfer Plan (STP)?

Some traditionalists favor choosing the all or nothing path when it comes to saving. That means either they spend an immense sum or they don't invest at all. In the past, spending massive sums has reaped huge returns. However, stocks have become somewhat temperamental, and quite a few individuals have suffered heavy losses. Because of the possible uncertainties that come with it, investors are becoming more hesitant each day to make lump sum investments. This is why, to mitigate risks, financial analysts propose a Systematic Transfer Plan (STP).

What is a Systematic Transfer Plan?

A Systematic Transfer Plan enables investors to shift their financial capital instantaneously and without any complications from one scheme to the other. This transfer happens on a daily basis, allowing investors to achieve a market advantage by changing to the shares when they offer higher returns. During price fluctuations, it protects the rights of an individual in order to mitigate the loss suffered.

The primary benefit of opting for an STP is the streamlined conversion and utilization process of funds. As the money is adjusted dynamically between the funds chosen, investors will benefit from the smooth and effective distribution of the capital available. Systematic Transfer Plan can only transfer an investor's financial capital between separate funds run by a single wealth management company; it is not feasible to switch between various plans provided by many Asset Management Companies.

STP is a good approach to stagger your investment over a particular period to balance losses and returns.

How does the Systematic Transfer Plan work?

In mutual funds, STP is an efficient method for averaging the investment over a given period. It relies on three considerations to determine whether an STP or lump-sum can be made - the actual asset portfolio of the investor, the risk profile of the investor, and, ultimately, the market perspective. At present, it will be wise for investors to follow the STP path, with the indices at a new level

Suppose you have raised ₹ 10 lakh from an asset selling and want to invest for 20 months in an equity fund via STP. You must first pick a debt fund that requires the STP option to invest in an equity fund. Select a debt mutual fund, then invest ₹ 10 lakh in the fund and then assess the volume and frequency to be moved from the debt fund to the equity fund. (In this situation, on a monthly basis, ₹ 50,000 must be moved in 20 installments).

Benefits of STP

There are many benefits of a systematic transfer plan scheme that make it an appealing choice for investors with a particular risk appetite. Some of them are listed below:

Consistent Returns

Investors can earn consistent returns through STP since the money invested in debt/liquid funds initially that fetch interest income till the money gets transferred to the equity funds. Debt funds comparatively earn more returns than Savings Bank account.

Stability

Investors can move their funds with an STP to comparatively safer investment schemes such as debt funds and money market instruments during periods of high market uncertainties. This helps an investor to guarantee the safekeeping of his/her financial wealth while at the same time generating steady returns. The returns made by STP are very accurate. This is because interest is generated by the balance in the source fund (debt fund) before you pass the entire sum.

Risk Management

At times, STP can also be used to switch the funds from a risky asset class to a less risky asset class. For example, say, you have started a SIP into an equity fund for retirement plans for 30 years. You may consider an STP route to switch the funds from Equity to Debt in to avoid the depletion of fund value when you reach your retirement. Here, in this way, you will have shifted all the accrued corpus to a safer haven by the time you retire.

Rupee Cost Averaging

An STP averages the buying price of an investor and protects him from capturing a high demand. When their average price is low, Rupee Cost Averaging follows the technique of buying in funds and selling them when their stock value rises, thereby realizing capital returns on the actual shares. For example, if the fund's NAV is ₹ 10 in the first month, ₹ 8 in the second month, and ₹ 6 in the third month, the average price of the fund will be ₹ 8 for the STP. A lump sum in the first month, on the other hand, will give the investor a price of ₹ 10.

Portfolio Rebalancing

The easiest way to manage your portfolio is with the STPs. You can easily move out to another fund of your choosing instead of spending on entry and exit loads each time you choose to invest. Another value of portfolio rebalancing is that it aims to meet long-term targets, such as asset formation and retirement.

Types of STPs

STPs are usually classified on the basis of the transfer of funds. These types are:

Fixed STP

Under the fixed STP, the transferred amount and the frequency are fixed and the money is transferred to the target mutual fund scheme. Investors, select the amount and duration according to their financial goals.

Capital Appreciation

Under this method of STP, only the profits that are generated from the investment are moved from the source funds to the target funds s form of STP and the capital portion remain safe.

Flexible STP

Such an STP is flexible, as the name implies. This means you can opt to move a number of sums to the target fund from the source fund. Investors normally like the sum due to the variations in the market conditions. For example, if the destination fund's Net Asset Value dips, then you should raise the sum and vice versa.

Are you looking for STPs?

Systematic Transfer Plan is suitable for investors who have limited capital but wish to achieve high returns by engaging in the equity market. It is also ideal for investors, who, at periods of financial volatility and unfavorable fluctuations, wish to recycle their capital in comparatively safer assets, such as debt instruments.

For anyone looking to commit a lump sum, STP is an ideal option but is not able to do so in one go. This may be that they are risk-averse and do not want to get mired in the uncertainty of the market. As a rule, they can even be suspicious of securities. Investors of this type can opt to invest in liquid or debt funds.

Things to remember while picking up a Systematic Transfer Plan

STP is undoubtedly a great way of investment, but then there are certain points that should be considered while opting for the same. They are:

Taxation

Even though STP is a smart strategy, the tax consequences and exit loads on the move should be known to you. In STPs most of the transactions are done from debt mutual funds to equity mutual funds and these transactions are considered as withdrawals and are subject to capital gains. So, whenever a transfer is made from debt-to-equity fund, Short Term or Long-Term Capital Gains rules of the debt funds are applied depending upon the period within which the transfers are done.

Exit Load

You need to make at least six capital transactions from one mutual fund to another to qualify for an STP. SEBI allows fund houses to charge exit loads while you are exempted from entry loads. The exit load cannot, however, cross 2 percent.

Time Period

The amount of lump-sum to be transferred through STP, the existing equity allocation of the investor, the investor's risk profile, and, ultimately, the business perspective is some of the deciding factors for the time period. It is also claimed that saving for a very long time (for example, for three years) in mutual funds by STP negates the benefit of putting the money to work in equities.

Why Systematic Transfer Plans?

Even if you need to make an initial lump-sum payment, a Systematic Transfer Plan is deemed better. The key explanation is, you might opt to move daily amounts from your source fund to other aim funds. This is a perfect way to not only increase your wealth but also boost your investment gains.

The STP is one of the most reliable methods for risk avoidance that investors should follow, but it also requires discipline. They do not, however, eliminate threats. When the market is low, you could also expect a decline in returns.

Happy investing!

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