Systematic Transfer Plan: What is STP in Mutual Funds?

Within investment instruments, there are different investment strategies and tools that investors can use to modify investments to most accurately suit their financial needs. The STP is one such investment approach within the purview of mutual fund investment. The STP or Systematic Investment Plan is a mechanism whereby an investor can transfer their capital from one mutual fund to another, provided both the funds exist within the same asset management company (AMC) or fund house.  

The transfer takes place instantly and entails a hassle-free process. It is worth exploring how an STP works, and how it helps investors increase their chances of profits while mitigating risks.  

What is a Systematic Transfer Plan (STP)?

As mentioned earlier, in the realm of mutual fund investing, a Systematic Transfer Plan permits investors to make a move and shift resources from one mutual fund to another within the same fund house. Investors may choose this method of investing in mutual funds as it allows them to explore different funds, giving them opportunities to make profits and spread their risk.  

With an STP in a mutual fund, shifts or transfers occur on an automatic basis (predetermined before you opt for an STP), periodically. Typically, investors fix a number of units to be transferred on a periodic basis from a “source scheme” to a “target scheme”. The source scheme may be a debt fund and the target scheme may be an equity fund.  

This gives investors an edge over the market, as they can shift their capital to other funds as and when they see the opportunity for higher returns. Hence, such a tool protects investors against fluctuations in the market, minimising potential losses.  

How does a Systematic Transfer Plan work? 

An STP permits investors to transfer or switch their resources (a certain amount of mutual fund units) on a periodic basis, from one mutual fund to another fund within the same fund house. Investors have the option of switching from any kind of scheme (like an equity scheme) to any kind of other scheme (like a debt scheme or a hybrid plan), based on certain conditions of the market.  

Types of Systematic Transfer Plans 

If you wish to use a Systematic Transfer Plan, there are many types to opt for:  

Fixed STP: This kind of STP gives investors the opportunity to transfer a fixed amount of funds to be transferred from one mutual fund to another.  

Flexible STP: Here, investors can enjoy the flexibility to make decisions on the total funds that are transferred as per investors’ needs. Based on educated market forecasts and conditions of the market related to the performance of a scheme, investors may want to transfer smaller or larger amounts of their current mutual fund. The minimum amount that may be transferred is reflective of the fixed nature of the amount, while a flexible amount to be transferred is based on volatility in the market or the performance of the scheme, hence, the flexibility of this kind of STP.  

Capital Systematic Transfer Plan: With a capital systematic transfer plan, investors can transfer the total returns arising from a mutual fund’s market appreciation to another mutual fund scheme that appears prospective and potentially shows an estimation of growth.  

Key Features of a Systematic Transfer Plan 

An STP in a mutual fund has features to be aware of and these are detailed below:  

In mutual funds, via the systematic transfer plan mode, investors may choose to invest any amount of their capital. The Securities & Exchange Board of India (SEBI) does not mandate any minimum investment amount. Nonetheless, you will discover that many asset management companies require ₹12,000 as a minimum amount of investment to avail of the STP.  

In case investors wish to avail of an STP, a minimum number of 6 transfers must be undertaken.  

For an STP, there is no entry load on mutual funds. However, an exit load may be levied on every transfer undertaken, based on the scheme’s exit load mechanism.

Exit loads are different for different schemes. A maximum of 2% is applicable when funds are transferred or redeemed. Furthermore, there are specific schemes that do not levy any exit loads for STPs.

The taxation of any STP is based on the same tax laws applicable to mutual fund investments in general.  

Benefits of Investing in a Systematic Transfer Plan

Now you know the answer to the question, “What is an STP?”, you may be eager to find out the advantages you get by investing with such a tool. Here are some key pros of using an STP:  

High Returns: STPs give you the perk of earning relatively higher returns by switching your investments to more lucrative funds while market swings are on. In this method, you gain an advantage over the market and maximise your returns via securities purchased and sold.  

Stability in Investment: When the stock market witnesses volatility, investors have the chance to protect themselves and transfer funds to comparatively secure investments, such as debt funds as well as money market instruments.  

Disciplined Investment Approach: If you opt for an STP, you get a disciplined way to invest as the transfer of funds is planned based on prior decisions.  

Investment Balance: The systematic transfer plan mode of investing in mutual funds offers you a potentially ideal way to balance your investments in mutual funds. Considering your risk tolerance, time horizon, and financial objectives, a potentially optimal investment mix of funds lets you invest in alignment with your shifting requirements. You have the chance to maximise returns while you mitigate risk in an effective manner.  

Rupee-Cost Averaging: This is an attractive feature of mutual funds where investors keep investing small sums of capital at frequent periods, irrespective of the conditions of the market. Such an approach results in averaging out the buying cost over time and facilitates the mitigation of market volatility.  

Taxation: Mutual fund investment returns are subject to taxation depending on the sum you invest, your holding period, your level of income, and the tax brackets you fall within. With a systematic transfer plan, you may research how you can lessen your tax burden when you make fund transfers to different schemes.  

Who Should Consider Investing in a Systematic Transfer Plan? 

Still wondering whether you are a good candidate for a systematic transfer plan. Well, here are some criteria to consider and decide if you should be the one opting for an STP:  

Low-Risk Investors: Appealing to investors with a low-risk profile, an STP offers steady investment. You can gradually invest in equity, transferring funds from debt/money market/liquid schemes to equity schemes in regular instalments, based on market volatility. Related to this, investors trying to avoid market fluctuations may also find an STP attractive.  

Investors with Limited Capital: Investors with limited capital, but who seek potentially high returns through equity markets, find this investment approach appealing.  

Long-term Investors: For those investors with a long-duration investment strategy, STPs may be considered. If investors follow this path diligently, they can make the most of long-run capital appreciation while still getting the opportunity to switch investment avenues when the need arises.  

Specific Goal-Oriented Investors: Investors may opt for an STP in a mutual fund investment if they have particular financial goals to be fulfilled and milestones to be met. With investments focused on your long-term goals, you can systematically work towards achieving them in an affordable and risk-averse fashion.  

Disciplined Investors Wanting Diversification: The STP is a disciplined way to invest and reap potential benefits. Moreover, investors who desire portfolio diversification may opt for this as investments are spread across debt and equity instruments.  

Conclusion 

Systematic Transfer Plans are solutions for investors who wish to invest their money according to their risk tolerance. With an STP function, investors are allowed to move their finances from one mutual fund scheme to another, within the same fund house, without any hassles. Applicable to mutual funds, they come with several benefits like stability, great returns, discipline in investment, and tax relaxations. Selecting the appropriate STP translates to maximising returns while mitigating risk.