Investors are nowadays concerned regarding the investment that yields lump sum amounts because of the potential risk attached to it. That is the main reason for the trend of systematic investment plans like STP or SIP in the financial market to mitigate the risk by earning a high return on the investment.
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What is a Systematic Transfer Plan?
STP is an abbreviation for Systematic Transfer Plan. SIP is an investment option where an individual invests a fixed amount in a mutual fund scheme regularly. For instance, you can invest Rs 1,000 in a mutual fund every month. STP is transferring money from one mutual fund to another.
In a Systematic Transfer Plan, investors invest a lump sum in a fund (debt fund) and then transfer a fixed amount from such fund to an equity fund regularly. Investors who have idle money in their account can opt for the liquid fund or ultra-short fund.
Features of Systematic Transfer Plan
The features of the systematic transfer plan are discus below:
- Minimum Investment: There is no minimum amount of investment to invest through a systematic transfer plan mutual fund. Moreover, most of the Asset Management Company (AMC) requires a minimum investment of Rs 12,000 to be eligible for this scheme.
- Entry & Exit load: At the time of entry in STP, you need to do at least six capital transfers from one mutual fund to another. There is no entry load on mutual funds, whereas, exit load is chargeable. A minimum of 2% will charge as an exit fee while redemption.
- Tax Charge: The tax will charge on the redemption or transfer of funds. Initially, for the first three years tax is chargeable as short-term capital gain tax (STGC).
Benefits from Systematic Transfer Plan
The benefits which an individual can avail while investing in a systematic transfer plan are as:
- Higher Return: STP provides an option to earn a higher return on the investment because initially, you will invest in a debt fund like the liquid fund. In addition, liquid funds are known to yield a higher return of 7% to 9% which is much higher than 4% of saving accounts.
- Stability: Due to the high degree of volatility in the stock market, investors can transfer their funds through STP to debt funds or money market instruments. It provides an investor with a benefit to safeguard the financial resource through earning a stable return on it.
- Managing Risks: STP is also beneficial because it allows an investor to move from risky asset class to less risky asset class.
- Rupee Cost Averaging: Systematic Transfer Plans average the cost of investment by investing in a lesser unit at higher Net Asset Value and more units at a lower price. As money gets transfer from one fund to another, which will provide the benefit of rupee cost averaging i.e., per unit cost of the plan will decrease.
- Re-balancing Portfolio: An STP re-balances individual’s portfolio regularly by moving investment from debt to equity and also equity to debt.
Drawbacks from Systematic Transfer Plan
Apart from the benefits, a systematic transfer plan has some drawbacks also which must be considered by an individual before investing in the STP scheme. Some negative sides of STP are discussed below:
- Exit load: Exit load is applicable when an investor switches from one scheme to an entirely different scheme. A minimum of 2% is charged as an exit fee while the redemption of the fund.
- Taxation: The tax is charged on the redemption or transfer of funds. Initially, for the first three years tax is chargeable as short-term capital gain tax (STGC). Tax is charged because units are necessarily redeemed from one scheme and invested in some other scheme.
- Limited Choice: It is not very easy to switch from one scheme to another scheme because it might include risk and lesser return while transferring to another scheme.
Who should invest in a Systematic Transfer Plan?
A systematic transfer plan is a great opportunity for the investors who want to invest lump sum but not in a single form. Therefore, it allows an investor to invest in multiple assets rather than in a single basket. It is meant for those individuals who have limited funds but want to generate a higher return. It is also suitable for such investors who want to reinvest their money in safer securities like debt or money market instruments.
Types of Systematic Transfer Plan
The three types of systematic transfer plan are as:
- Fixed STP: In fixed STP, the amount and frequency of investment are fixed. Investors can decide the amount as per his/her capability and financial goal which will remain constant all over the period.
- Capital Appreciation: Under this form of STP, only capital appreciation of investment is transferred from one source to another. The main purpose of this plan is to reduce the risk and keeps capital safe.
- Flexi STP: Flexi STP is flexible in nature because it allows an investor to transfer varied amounts from one source to another source. It also allows investors to avail return as per market rate fluctuation.
How to start Systematic Transfer Plan
The necessary steps are followed while investing in any systematic transfer plan are as:
- Based on individual risk capability, financial goals, decide the amount to be transferred systematically from one fund to another source of fund.
- Choose the frequency within which the fund will systematically transfer from one source to another source.
- Last but not the least, select a source of a mutual fund from a list of the scheme.
Things to remember while investing via STP
The important things to be remembered by an individual before opting for a systematic transfer plan are:
- STP is recommendable if you have a lump sum amount to invest.
- At least six capital transfers from one mutual fund to another make mandatory by SEBI.
- STP is considered as a risk-reducing strategy but it cannot eradicate the risk. But if the market is low, there are chances of a reduction in the return.
- It is necessary to keep an eye on the underlying assets and its phase. It will be irrational to transfer capital when the market is at its peak. STP is a useful strategy to manage risk without affecting the return.
How does a Systematic Transfer Plan work?
If an individual invests Rs 10 lakh in equity through STP, firstly he will select a debt fund that allows STP to invest in a particular equity fund. Secondly, the next step is to invest Rs 10 lakh in the debt fund. Then only he will avail the option to invest money from debt fund to equity fund by choosing frequency.
Illustration:
| Investment | Money Kept | Type | Investment Period | Expected Return |
| Rs 10 Lakh | Saving Account (4% ROR) | SIP | 5 years (Rs 2 lakh yearly) | Rs 5.8 Lakh |
| Liquid Fund (6.5% ROR) | STP | 5 years (Rs 2 lakh yearly) | Rs 6.4 Lakh |
Difference between SIP and STP
| Basis | SIP | STP |
| Type of Plan | Investment | Transfer |
| Process | A fixed amount of money is invested in one scheme at a regular interval deducted from the saving bank account. | Money is transferred from one mutual fund scheme to another scheme. For instance –the debt fund is transferred to the equity fund. |
| Purpose | The main purpose of SIP is long-term capital appreciation. | The objective of STP is capital appreciation on idle money lying in the bank account. |
| Tax applicable | There is no tax applicable in investing. But the capital gain is applicable at redemption i.e., Short-Term Capital Gain or Long-Term Capital Gain. | On the transfer of fund from one scheme to another scheme, tax is applicable which consider redemption from the previous mutual fund. |
| Advantages | SIP has the advantage of the power of compounding, rupee cost averaging, etc. | STP has the advantage of consistent return, portfolio rebalancing, rupee cost averaging, etc. |
Conclusion
All the mutual fund schemes may differ from each other. Therefore, investors must verify and analyze all the investment options while opting for one. One must carefully understand the scheme structure before investing in it.
Frequently Asked Questions
A systematic Transfer Plan is a scheme where an individual invests a fixed amount in a mutual fund scheme regularly.
Firstly investor needs to invest in a scheme which is from the list of available source scheme. Then an individual needs to fill an STP enrollment form and choose the target scheme in which he/she wants to transfer the amount. Also, he/she needs to specify the frequency, amount, and date of the investment.
An investor with a lump sum amount can park money in one fund which systematically transfers it to another scheme. It allows individuals an opportunity to generate higher returns who have limited funds.
No, you cannot modify the STP account. You can start a new STP with the desired amount by filling new STP enrollment form.
A Systematic Investment Plan (SIP) is a scheme that allows an investor to invest a fixed amount at pre-specified intervals into a mutual fund scheme. Whereas a Systematic Transfer Plan (STP) is a scheme that transfers a fixed/amount from one scheme to another scheme.
