Tried a Systematic Transfer Plan Yet?

In a Systematic Investment Plan (SIP) you transfer a certain amount of money from your bank account to a mutual fund scheme(s) of your choice at a fixed interval. Here your money source is your bank account, while your investment is the mutual fund scheme. But what if you can transfer money from one investment to another, SIP style? This is what a Systematic Transfer Plan (STP) is, in a nutshell.

But we don’t ever leave you with just a proverbial nutshell, do we? So, here is a detailed look at the world of STP and how it can be ideal for you.

Systematic Transfer Plan: Basic Understanding

In Systematic Transfer Plans, a fixed amount is automatically transferred from one mutual fund scheme to another at a regular interval. Both the fund schemes must be schemes of the same fund house. This is done by investors for reasons like averaging out the investment, tackling market volatility, and diversifying risk profile, to name a few. Because of these reasons, you will rarely find an investor setting up an STP between two equity funds or two debt funds.

Investors opting for an STP prefer to transfer funds from a fixed-income fund or liquid fund to an equity fund or vice versa. The two funds almost always have different risk profiles. Like SIP, investment in mutual funds becomes effortless with STP. To start an STP you need the following components:

A source fund – It is the fund in which the investor will transfer the money or already has a significant amount invested.

A destination fund – It is the fund which will receive the systematic transfer of funds from the source funds. It will continue to receive funds till the source fund is exhausted or as per the STP arrangement.

The transfer frequency – It is the interval between two STP transfers from one fund to another. Transfer frequency is generally on a monthly, quarterly, half-yearly, or annual basis.

The transfer amount – It is the amount which will be transferred regularly from the source mutual fund to the destination mutual fund. It can be a specific amount or a percentage of the total fund available in the source mutual fund.

How To Start Your STP?

While the basic components of an STP remain the same, you can still improvise and personalise your STP.

In a flexible STP arrangement, you can decide the total amount to be transferred as per your financial goals. In a fixed STP, the amount to be transferred and the frequency remains fixed during the tenure of the plan. Capital STP is where the market appreciation in the source fund can be transferred to the destination fund to either mitigate risk or tap higher growth opportunities.

You can set up an STP at your online broker’s platform, by selecting the two funds, the amount and frequency and confirming. You can also apply offline with the concerned AMC.

Why Go For STP?

Systematic transfer plans can suit the financial goals of investors for a variety of reasons. Here are some of the reasons that may convince you to go for an STP.

• Risk Management – If you have a lump sum amount to invest during volatile market conditions, investing all of it in equity funds may be risky. STP will help you spread your investment across different market scenarios. Investors looking to minimise risk exposure at an old age can set an STP from an equity fund to a fixed-income fund. This will gradually reduce the risk exposure in the mutual fund portfolio.
• Asset Allocation – If an investor is seeking to diversify the portfolio by adding a new asset exposure, STPs can be used to do so. Through STP you can ensure that the new asset exposure is gained gradually without suddenly disrupting their overall portfolio.
• Market Timing – By opting for an STP during market downturns and bull runs, investors can make the most of buying opportunities or protect existing returns. And this can be achieved over a period to address volatility.
• Regular Cash Flows – Some investors may want to stay invested in the market but also open up an assured source of income, or vice versa. STP between equity-related and fixed-income funds can help them achieve it.
• Rupee Cost Averaging - Timing the market requires expertise and regular monitoring. However, if you invest through STP (or SIP for that matter), you can buy more units at low prices and fewer units at high prices. Over time, this can result in lower your NAV through rupee cost averaging.
• Tax Planning – The capital gain tax rules are different for debt and equity funds. Through an STP, an investor can affect a gradual shift of funds from equity to debt funds, or vice versa. This can be designed to manage capital gains tax more effectively.

Final Words on STP

For all the benefits that one can derive from STPs, it has a dependency on perfect planning and market conditions. If you plan to implement an investment strategy involving an STP, you must ensure that you consult with a financial advisor. Your STP must align with your financial goals and risk appetite, and be in sync with prevailing market conditions.