Systematic Transfer Plan – Time to Ride out Market Volatility
Well, everyone knows what is the Systematic Investment Plan (SIP) , but what about the Systematic Transfer Plan(STP) ? Unlike SIP, the Systematic Transfer Plan is not that famous term investors may be aware of.
Whilst the Systematic Investment Plan is the transfer of money from savings to mutual fund, whereas Systematic Transfer Plan is transferring money from one mutual fund to another.
Basically, STP is a smart and simplified strategy to stagger all your investments over a specific term to reduce balance and risk returns.
HOW TO START?
Systematic Transfer Plan is a summarized tool in mutual funds to average your investment over a certain time period. To decide on whether you should do lumpsum or an STP depends on three main factors:
- The risk profile of an investor
- An investor’s current allocation to equities
- The market view
FEATURES OF A SYSTEMATIC TRANSFER PLAN
A glance below:
- Minimum Investment: There is as such NO minimum investment to invest in the source fund, but there are some AMCs that insist on a minimum amount of INR 12,000.
- Lucrative & Disciplined: Systematic Transfer Plan enables lucrative and a disciplined transfer of funds between two mutual fund schemes. Mostly, investors opt STP from a DEBT FUND to an EQUITY FUND.
- Entry & Exit Load: You need at-least six capital transfers from one mutual fund to another to apply for a Systematic Transfer Plan. Whilst, you are free from entry load; SEBI allows fund houses to charge up to 2% exit load. The AMC calculates exit load based on fund type and investment tenure.
- Taxation: Whilst a STP is a good strategy, but you should be aware of the exit load and tax-implications on the transfer. Ever transfer from one fund to another is treated as a redemption and fresh investment. This ‘redemption’ is taxable. The money transferred at an initial 3 years from a debt fund is subject to short-term capital gains tax.
BENEFIT FOR AN INVESTOR?
- Higher Returns: If you are choosing STP you end up generating high returns, this is because for STP you’ll be initially investing the lumpsum in a debt fund just like a liquid fund.
- Steady Returns: The returns earned via STP are reliable. Reason being, the amount in debt fund generates interest until you transfer an entire amount.
- Rupee Cost Averaging: STP averages the cost of investment by buying fewer units at high NAV and more units at a low cost. As your money transfers from one fund to another, the ‘fund manager’ will keep purchasing additional units. Therefore, you’ll get the benefit of rupee-cost averaging.
- Rebalancing Portfolio: Your portfolio should strike a balance between equities and debt. A STP re-balances the portfolio by moving investments from equity to debt funds and vice-versa.
WHO SHOULD INVEST?
Systematic Investment Plan is good to go for those who seek to invest in a lumpsum but are not willing to invest them at once. Reason being, they are risk-averse and don’t want to get tangled in the market-volatility. Such investors can place their money in a debt or liquid fund.
TYPES OF SYSTEMATIC TRANSFER PLAN
- Fixed STP: The amount is fixed, and the investor can decide the amount as per his/her financial goal.
- Flexi STP: Just like the name, STP is flexible which simply means the investor can choose to transfer varied amount from the source fund to the target. Generally, the amount is chosen by investors depends upon the market fluctuations.
- Capital Appreciation: Here, the capital appreciated is transferred from source fund to destination fund.
THINGS TO REMEMBER WHILST INVESTING
- Opt for STP only if you have lumpsum amount and which you don’t need on an immediate future.
- Although the fund house decides the minimum investment be made but according to SEBI guideline you need to make at-least 6 STPs.
- Try to keep an eye on the underlying assets and phrases.
- You need to be disciplined and stable. Even if the market is fluctuating, try not to opt out of the plan. It will defeat the purpose.
Like said, STP is a useful strategy that will manage your risks. For now, Gulaq offers you handpicked funds from the various fun houses.
*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.