Systematic Transfer Plan (STP)

Systematic Transfer Plan (STP) in Mutual Fund

Systematic Transfer Plan (STP) is a variant of SIP that provides investors with the ability to use the same asset management company to transfer fixed amounts from one scheme to another regularly.

This feature helps investors rebalance their investment portfolio by seamlessly switching between different asset classes. This reduces volatility and helps you reach your desired financial goals.

Example –

Let us consider an investor who earns a lump sum of Rs 5 Lakhs through the sale of an asset. The investor could invest the entire amount in a debt fund and then give a mandate to the AMC to transfer a pre-determined amount every month into an equity mutual fund over some time, let’s say 1 year. This will help to reduce the cost of acquisition and tackle volatility in equity markets.

Types of Systematic Transfer Plan (STP)

There are 3 ways to systematically transfer money from one scheme to another, the process of one-time registration with the AMC remaining the same

Fixed STP

Investors transfer a fixed amount from one investment to another

Capital Appreciation STP

In this type, investors only take out the profit from one investment fund and transfer it to another fund of choice

Flexi STP

Investors can transfer variable amounts based on the valuation of their portfolio. If equity portfolio goes down investor needs to transfer a higher amount.

Why & When STP?

STP can be used in multiple scenarios, here are some of them

Debt fund to Equity fund

Have a lump sum amount but do not have the risk appetite to invest directly into an equity fund or market conditions are unfavourable for equities, you can put the lump sum amount in a debt fund and systematically transfer the amount to an equity fund.

This helps you reduce risk and volatility and works just like a SIP but for a limited period.

Equity fund to debt fund

When markets are overvalued transfer the amount from equity fund to debt fund for stable reasons and do the reverse when markets are undervalued.

Nearing your investment goals

As you near your investment goals transfer the amount from equity fund to debt fund to reduce portfolio risk and safeguard your gains.

Tax saving

Don’t have additional money to invest in mutual funds but want to save tax? Transfer money from fund to ELSS (Equity Linked Saving Scheme) fund and get tax benefits. official zlibrary domain z.library . Find free books

Benefits of Systematic Transfer Plan

Reduce risk and volatility

A portfolio can be easily re-allocated with STP to cut down on risks and safeguard your gains in times of market volatility.

Just like STP, but better

Case 1 – Considering the earlier example you invest Rs 5 Lakhs through a SIP, Rs 25,000 monthly. For 20 months, you would achieve returns of interest from bank and equity fund returns.

Case 2 – You invest lumpsum Rs 5 Lakhs in debt fund and use STP transfer amount to equity fund.

You can achieve more returns in case 2 as a debt fund are more tax efficient compared to Fixed Deposits and on an average provide more returns as compared to a savings account or fixed deposit.