A systematic transfer plan (or STP) as the name suggests means transferring of funds from one mutual fund scheme to another on a set periodic basis. This is similar to when you shift some coins from one piggy box to another to achieve some specific goal. Similarly, a mutual fund allows you to smoothly shift some invested amount regularly to another scheme to open up new investment avenues or fulfill certain objectives. So, let’s discuss in detail the meaning of STP, its working, benefits, and SIP vs STP points.
STP Meaning in Mutual Fund
A systematic transfer plan is a MO which you can transfer a fixed amount or units from one mutual fund scheme to another scheme. It is an automated process wherein the amount and date of the month (week or quarter) need to be set beforehand.
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Based on the market outlook, you can use the STP in two common ways. You can invest the lumpsum amount at one time in a low-risk debt scheme and then transfer the funds to a higher-returns equity scheme with no need to time the market. Also, it can also be used as another way to mitigate the risk by moving the investments from an equity fund to a debt fund.
One crucial thing is that you can only start the STP in two schemes of the same fund house. This means that you cannot start an STP from Aditya Birla MF to SBI MF.
How does a Systematic Transfer Plan Work?
Suppose you have a corpus of ₹10 lakh which you want to invest but the market is highly volatile and you don’t want to invest in equity funds right now. So, you can invest the lumpsum amount in a debt fund (or liquid fund) and then start the STP to slowly transfer it to an equity fund thereby reducing the risk as well as with no need to analyze the correct market timing.
You give the mandate to the fund house to transfer ₹5,000 every month from a debt fund. The debt fund balance will reduce while the equity fund balance at the same time will increase. The process continues until the balance of a source debt fund scheme turns nil or you intentionally choose to stop the STP.
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Instead of keeping the money in a bank, you can continuously earn returns (which might be higher than bank savings accounts) from debt funds and then further capitalize on the higher returns from an equity fund.
3 Types of STP in Mutual Fund
After knowing STP meaning in mutual fund, let’s understand the types of STP. Here are the three types of ways through which you can do the periodic transfer of funds.
1. Fixed STP
In this type of STP, you set the mandate to transfer the fixed amount or units to one mutual fund scheme from another. In the whole period, the total transferable amount remains fixed.
2. Flexi STP
In the Flexi Systematic Transfer Plan, the installment amount can vary based on current market conditions or some defined criteria. The investors can decide to transfer a higher or lower amount considering the scheme performance or market volatility.
3. Capital Appreciation STP
In this one, only the capital gains (or earnings) from a source scheme are transferred to the destination scheme. This means the higher the returns from a source scheme, the more the amount that can be invested into the destination scheme.
Benefits of Systematic Transfer Plan (STP) in Mutual Fund
A systematic transfer plan allows you to transfer funds without any stress and with no need for manual intervention. With structural planning and investments, you can certainly get many benefits in this mode, which are as follows:
1. Averaging the Cost
STP (Systematic Transfer Plan) helps in averaging the cost of investment because you will get more units when the destination fund’s NAV is low and lower units when the fund’s NAV is high. This way you can average the cost of investing and reduce the impact of market volatility.
2. Grab Higher Returns
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During market swings or bullish nature, you can systematically park your funds towards equity funds, thereby increasing the potential to earn higher returns. Alternatively, if the interest earnings of debt funds are rising, you can manage to earn some more money.
3. Faces Market Volatility
At times of market volatility or when the equities are showing different colors, you can tactfully move towards slightly safer avenues like debt funds. A systematic transfer plan helps you face market uncertainty and ensures that your trading plans don’t go off track.
4. Portfolio Rebalancing and Diversification
While creating a perfect diversified portfolio can be tough and for that, you need to continuously rebalance your portfolio. STP provides you with a direct way to get exposure in one fund and also in another type of fund. For example, if the equity price increases, then your portfolio has a higher weightage of equity. To balance it out, you can gradually shift the funds to debt schemes to keep up with your desired asset allocation.
5. Good for Windfall Earnings
A systematic transfer plan is good for investing windfall earnings like bonuses, dividends, and property sales proceeds. Initially, you can invest the amount in debt funds and then you can thoughtfully relocate it to the equity funds for wealth creation in the long term.
6. Reduces Market Timing Risk
Analyzing the exact market timing to enter or exit can be difficult, but STP can be fruitful here. Through STP, you can invest continuously in equity funds with no need to keep an eye on the market all the time. At the same time, you can remain invested in a debt fund.
7. Disciplined Investing
STP in mutual fund inculcates a discipline in your investing approach with the whole automated process based on a pre-set amount and frequency. You can avoid emotional bias and you don’t keep on changing your decision with the market waves.
8. Confidence in Investing
For newbie investors or those who have a low or moderate risk appetite, STP helps them to swiftly expand towards a higher return avenue with equity funds. Beginning with debt funds, they can gradually shift towards equity funds which give them confidence in investing. They can also stop or pause the STP anytime if things are not right for them.
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- 20 Lac+ unique clients
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9. Good to Fulfill Long-Term Goals
By starting the STP towards a debt fund from an equity fund, you can minimize the risk of your investments. With a long-term view, you can shift your money towards a more secure fund. Suppose you are in your 20s and you have invested in an equity fund to create higher wealth. As you approach your retirement age, you can slowly transfer it to a debt fund to reduce risk and fulfill long-term objectives.
SIP vs STP
SIP (Systematic Investment Plan) is a method to invest regularly in a single scheme from a bank account whereas STP (Systematic Transfer Plan) allows you to periodically transfer the funds from one mutual fund scheme to another. While both schemes need a pre-set amount and frequency, still there are points to know about SIP vs STP.
SIP helps you invest a fixed amount for a long time in one fund while STP helps you invest a lumpsum amount in a staggering way to avoid market volatility. In SIP, you pay the tax at one time when you redeem the fund. However, in STP, you need to pay tax each time when you redeem the units of a source fund.
When you want to invest the lumpsum amount lying idle in your bank account, SIP is gradually investing the amount leading to a loss of opportunity to earn higher returns. In this scenario, you can make higher returns through STP because your lumpsum amount is invested in a debt fund and you are also earning returns in an equity fund.
Conclusion
A systematic transfer plan is a mode to invest in more than one mutual fund at the same time. In this one, you gradually shift the funds from one MF scheme to another. This investment approach helps you average the cost of investment, reduces the impact of market volatility, and provides a way to portfolio rebalancing. You can set up an STP by opening a demat account with SMC Global Securities and investing in mutual funds of your choice.
FAQs
Is STP better than SIP?
STP is ideal when you want to gradually transfer the funds from one scheme to another and get the benefit of both worlds. SIP is helpful when you want to invest some amount every month to stay disciplined and earn compounded returns.
Is STP taxable?
Every time you redeem the units of the source fund, there are capital gains that are taxed. It is dependent on the type of fund and holding period.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
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What are the disadvantages of STP in mutual funds?
STP is not fully safeguarded from the market movements and over the multiple transfers it can impact the returns and units purchased. Also, you might have to pay the exit load when you redeem the units from the source scheme.
Is STP better than lumpsum?
In the bullish equity market, lumpsum is better because you can make higher returns on a single fund. In STP, you may miss out on such great opportunities with a staggered approach but it can help in reducing risk to some extent.
References:
https://www.mutualfundssahihai.com/en/node/191
https://www.livemint.com/mutual-fund/mutual-funds-what-is-a-systematic-transfer-plan-and-how-to-set-up-it-savings-investments-stp-11724653852844.html
https://www.mutualfundssahihai.com/en/difference-between-sip-and-stp
