Most mutual fund investors know about Systematic Investment Plans (SIPs) but only a few know about Systematic Transfer Plans (STPs). A Systematic Transfer Plan is a fantastic facility provided by mutual fund companies.
An investor can take advantage of the distinct features of STPs in multiple ways. The following guide discusses STPs & every potential doubt you can have.
STP Full Form & Meaning
STP in mutual funds stands for “Systematic Transfer Plan”. It is basically a facility offered by mutual fund companies that allow investors to transfer a fixed amount or a specific number of units from one mutual fund scheme to another within the same fund house.
How it works: STPs are used when investors wish to shift their investments gradually from one mutual fund’s scheme to another. The first scheme is called the “Source scheme” and the second “Target scheme”.
An investor first decides on the amount or the number of units to be transferred from the source scheme to the target scheme. The transfers can be made on a monthly, quarterly or any other predetermined frequency.
Further Reading: Guide to Start SIP Investment
Types of STP
Keeping different types of investor needs in mind, AMCs offer various types of STPs. Here are some most common types:
[A]. Fixed STP: A fixed amount or number of units is transferred at regular intervals.
[B]. Flexi STP: Investors can dynamically adjust the transfer amount based on their needs. If they don’t adjust, the predetermined amount will be transferred as per the scheduled intervals.
[C]. Capital Appreciation STP: In this type of STP, only the capital appreciation or gains made on the investment in the source scheme are transferred to the target scheme. The originally invested amount remains in the source scheme.
[D]. Trigger-Based STP: Under this, the transfers are triggered based on predetermined market conditions or performance indicators. For Example; an STP may be triggered when the net asset value (NAV) of the source scheme reaches a certain level or when a specific market index reaches a particular threshold.
Advantages Of STP
Systematic Transfer Plans come with many useful advantages discussed below.
STPs automate the process of investing in a desired fund. Once the initial instructions are set, the transfers don’t need any manual intervention. This convenience saves time & effort for investors enabling them to focus on other aspects of financial planning.
2. Rupee Cost Averaging
By investing a fixed amount at regular intervals, investors automatically buy more units when prices are low and fewer units when prices are high. This strategy helps in reducing the impact of short-term market volatility and potentially enhances the average purchase price over time.
3. Portfolio Rebalancing
STPs offer an effective way to rebalance your portfolio. It is an important strategy to strike a balance between risk and returns. For example, if the equity portion of the portfolio has grown significantly, an investor can initiate an STP to transfer funds from the equity scheme to a debt or balanced scheme to maintain the desired asset allocation.
4. Risk Management
STPs can also be used as a risk management strategy. Investors can move their funds from a high-risk scheme to a low-risk one to reduce risk. Also, an STP may help in mitigating sudden market fluctuations & reduces the risk associated with making a large lump-sum investment.
Disadvantages of STP
If something comes with advantages, it also has some disadvantages. Similarly, STPs have some disadvantages.
1. Market Timing Risks
By using a predetermined schedule, investors may miss out on potential gains if the market performs exceptionally well during the scheduled transfer periods.
2. Inefficient use of funds
The funds in the source scheme may temporarily remain idle before being invested in the target scheme. This period of idle funds can result in missed investment opportunities affecting overall returns.
STP Vs SIP
Here are some key differences between the two strategies of investing in mutual funds.
- STP focuses on transferring funds between two mutual fund schemes while SIP focuses on regular investments in a specific mutual fund scheme.
- STP provides flexibility in transferring funds based on a predetermined schedule while SIP offers flexibility in choosing the investment amount and frequency.
- STP can be used to manage risk, adjust an asset allocation or take advantage of investment opportunities whereas SIP emphasizes disciplined and regular investing for long-term wealth accumulation.
Tax Treatment of STP
When funds are transferred from the source scheme to the target scheme through an STP, it is considered a redemption from the source scheme and an investment in the target scheme.
The capital gains tax implications will depend on the holding period and the type of mutual fund schemes involved.
1. For Equity Funds
Any gains from the units held for less than one year will be considered short-term capital gains & taxed accordingly. Any gains from the units held for more than one year will be considered long-term capital gains & taxed accordingly.
For Equity funds as a source fund, STCG is taxed at 15% and LTCG at 10% without the benefit of indexation.
2. For Debt Funds
Any gains from the units held for less than three years will be considered STCG & units held for more than three years will be considered LTCG. After 1st April 2023, STCGs & LTCGs are taxed at the applicable income tax slab rate.
Note! In addition to the CG or IT rules, you may also be liable to pay a dividend distribution tax (DDT) if you invest in a dividend-paying fund.
How To Set Up STP
- Choose a mutual funds house.
- Select “Source Scheme” & “Target Scheme”.
- Decide on the amount & frequency of STP.
- Fill out the STP application & submit it to the fund house.
- Once the application is approved, the STP will begin.
Further Reading: How to Set Up SIP Account
Factors to Consider While Selecting Source & Target Scheme
The prime objective of investing is to generate desired returns out of your investments but tiny mistakes can eat on your returns. Hence, choose schemes considering these factors in mind:
Expense ratio: The expense ratio represents the annual fees and operating expenses charged by the mutual fund. Lower expense ratios can positively impact the overall returns of the investment.
Exit loads and fees: Exit loads are charges imposed on investors for redeeming units within a specified period. Understand the implications of these charges on your investment decisions.
Tax implications: Understand the tax implications associated with the source scheme, including the taxation of capital gains and dividends. Consider the impact of taxes on your overall investment returns.
Is STP suitable for all types of investors?
The suitability of STPs depends on an investor’s individual circumstances, financial goals, risk tolerance, and investment preferences.
How frequently can I make transfers through STP?
While most popular frequencies are weekly, monthly or quarterly, some fund houses may also offer customized frequencies.
Are there any minimum or maximum transfer limits for STP?
Yes, funds houses usually set minimum or maximum transfer limits for STP.
Can I set up an STP between different mutual fund houses?
No, STPs are designed to transfer funds within the same mutual fund house or family of mutual funds.
Is there any lock-in period associated with STP?
No, there is typically no lock-in period associated with Systematic Transfer Plans (STPs) in mutual funds. However, individual mutual fund schemes may have their own lock-in period.
Can I stop or modify an ongoing STP?
Most fund houses offer the flexibility to stop or modify an ongoing STP. However, it is important to understand the fees and implications involved before making a decision.
Can I choose the date and time for STP transfers?
Obviously, STPs are designed to give you this flexibility.
Is it possible to change the target scheme during an ongoing STP?
Yes! It is possible to change the target scheme during an ongoing STP by contacting the fund house and requesting the same.
Can I use STP for lump-sum investments as well?
You can invest a lump sum amount in a source scheme but you can not set up STP for the same. This is because STPs are primarily used for investors who want to shift their investments gradually not at once.
Can I set up multiple STPs simultaneously?
Yes, you can set up multiple Systematic Transfer Plans (STPs) simultaneously in mutual funds.