What is a Systematic Transfer Plan(STP)?

Unless you're living under a rock, you might be familiar with the term SIP. Now, what if we tell you another similar investment option that might earn a little more than SIPs?

There is no doubt in the fact that SIPs are a great tool for individuals who can't allot a whole lot of time in studying the markets and investing manually. But not everyone has a regular periodic income, right? What if you have a large sum of money and want to invest it all at once in some SIP-like-thing?

Enter STP. An extension of the logic behind SIPs, this investment option helps you to earn a little extra with lower risk than the equity markets. So, if you aren't aware, here's your guide to STPs.

What is STP?

STP is a strategy of scheduled transfer of funds from one asset or asset type to another asset or asset type. The main idea behind an STP is to earn a bit more from equity funds by a lump payment while not having to time the markets. In a volatile scenario, investors might employ the Systematic Transfer Plan (STP) as a coping strategy.

STP allows for the organized and scheduled transfer of funds between two mutual fund schemes. In most cases, an STP from a debt fund to an equity fund is initiated by the investor. 

STP is particularly suitable for investors who have a lump sum of cash and want to invest in equity funds but are fearful of market timing. They can put the lump sum money in a liquid or debt fund and use the STP option to transfer a set amount of money into the target equity fund on a regular basis. It is optimal for people with limited resources who want to invest in the stock market and generate high returns.

Minimum Amount of STP  
Minimum amount required to transfer from source to target funds can vary from Rs. 500 to 1000 per installments depending upon the funds you choose from.

Minimum No. of STP  
Minimum number of transfers can range from 6. 

Minimum Investment required in STP 
This is the minimum lump sum amount which the investor invests at the initiation of the scheme. It starts from as low as 12,000. As per SEBI guidelines, there's no such minimum amount criterion for investing in STP's

Periodicity of transfer 
You have the option of choosing from daily, weekly, monthly, and quarterly transfers.

Taxation, Entry Load and Exit Load chargeability at each level of funds transfer

Why should you invest through STPs?

1. Rupee Cost Averaging is a process that requires investing in funds when their average price is low and selling them when their market value soars, resulting in capital gains on individual securities. 

For example, consider the value of the Mutual funds given below –

In such a case, STP will get an investor an average price of Rs 95.80. On the other hand, a lump sum in the first month would get him/her a price of Rs 100.

2. It rebalances the portfolio by transferring investments from debt funds to equity funds or vice versa.

3. The returns generated by STP are fairly consistent. Debt fund returns are typically higher than savings bank account returns and aim to provide reasonably higher performance.

Drawbacks of investing in STP's

1. Although Investment in STP can seem more reliable and profitable than traditional investment options, it doesn't guarantee higher returns. The investor should diligently analyze market moves in order to maximize his gains.

2. You can only switch from one scheme to another if they are both handled by the same fund firm.

3. When an investor transfers from one scheme to another, the term "exit load" is used. In most cases, the exit load is under 1% if you move within a year of investing.

4. STP is subject to the short-term capital gain (STCG) tax. This occurs because units from one scheme are basically redeemed and invested in another plan. This capital gains tax is triggered by the treatment of a switch as redemption.

Categories of STP

Systematic Transfer plans can be divided into three categories, namely -

Fixed STPs, Flexi STPs. And capital Appreciation STPs

1. Fixed systematic transfer plan – In Fixed STPs, investors can collect a fixed amount of cash from one Investment to another Fixed STP. Investors can choose this amount based on their financial objectives and apply for it.

2. Flexi systematic transfer plan - The investor has the option to transfer a variable sum in Flexi STP. The minimum quantity will be the set quantity, and the variable quantity will depend on the market volatility. Generally, investors consider the amount depending on the market rate variations. If the destination fund's Net Asset Value falls, you can increase the amount, and likewise.

3. Capital Appreciation systematic transfer plan – In the case of capital appreciation, STP's investors can take the profit portion from one Investment (Source fund) in Capital Appreciation STP and invests in the other (Target Fund). Hence, in case the capital amount remains intact in the source funds itself. For e.g. – An investor earns a capital appreciation of Rs. 5,500 on his lump sum amount invested in debt fund then, Rs.5,500 i.e. the amount of capital appreciation will get transferred to the equity fund from the liquid funds.

Things to take into account while investing in STPs

1. The Target Equity Mutual Fund you choose should be based on your risk profile. During the market's upswing, small-cap mutual funds typically outperform large-cap mutual funds in terms of returns.

2. Only use STP if you have a large sum of money to invest that will not be needed in the near future.

3. Having an understanding of the risk involved. While it is possible to reduce your exposure to market risks through STP's, it is not possible to completely eliminate them.

4. Understanding the performance of the market value of assets and the reasons that cause them to fluctuate would assist investors in getting the most out of their money.

5. Keeping in mind the exit load and tax implications while calculating returns from STP.

6. STP, like SIP, is only effective if it is followed correctly. Breaking STP due to short-term market or interest rate fluctuations will only ruin your money over time. Investors must adhere to it with proper discipline. 

The Bottom Line

STP is a useful risk management method that does not have a significant influence on your returns. It is one of the most reliable risk-reduction strategies available to investors. However, they won't be able to eliminate all the risks as such. When the market is down, you might expect lower returns.

Notwithstanding whether the tool is an SIP or STP or anything else for that matter, the key to investing is research. Ensure that you do that well before putting your hard-earned money into any investment avenue.

Invest wisely!