WHAT IS A SYSTEMATIC TRANSFER PLAN?
It is inevitably true that most of the investors are familiar with the term Systematic Investment Plan. However, Systematic transfer plan (STP) can be the new concept for some of the investors. Systematic investment plan (SIP) is basically a transfer of money from savings to mutual fund plan, whereas Systematic transfer plan (STP) stands for transferring money from one mutual fund to another.
STP is considered as an ideal technique to make your investments steady over a period of time in order to accumulate balanced returns and reduced risk factor. For example, investors can earn risk-free returns if invested in equities ‘systematically’ even during the conditions of volatility in the market. In this, investors are allowed to put a lump sum in one fund and thereby transfer a fixed amount to another scheme. The former fund is termed as source scheme or transferor scheme and the latter fund is called target scheme or destination scheme.
FEATURES OF SYSTEMATIC TRANSFER PLAN
There is no set standard minimum investment amount for investing in the source fund. However, it is possible to start with a minimum amount of Rs.12000 in the systematic transfer plans by some AMCs.
Entry & Exit load
Investors are required to do minimum of six capital transfers from one mutual fund to another in order to apply for an STP. There is no entry load levied on STPs, however, fund houses are permitted by SEBI to charge an exit load at STPs of up to 2%. Exit loads are computed based on investment duration and type of fund.
Systematic Transfer Plan (STP) facilitates a disciplined and planned transfer of funds from one mutual fund to another. Investors usually tend to transfer funds from a debt fund to an equity fund.
Taxation on STPs
Investors opting for a Systematic Transfer Plan should always be aware of the tax implications and exit load imposed on the transfers made. In this plan, every transfer initiated from one mutual fund to another is deemed to be redemption and fresh investment. Thus, taxation is imposed on redemptions. The money being transferred from a debt fund for the first 3 years is taxed in the name of Short term capital gains (STCG). However, the returns are expected to be higher than those earned in a bank account even after the tax implications imposed.
WHO SHOULD INVEST VIA SYSTEMATIC TRANSFER PLANS?
STP is an ideal option for investors who are interested in investing a lump sum and not all at once. This can help investors to avoid risk factor and market fluctuations. Those investors can choose to put their money in a liquid or debt fund. When this money gets transferred to an equity fund, they get the fixed returns from the debt funds along with potential returns from the equity scheme.
HOW TO GET MAXIMUM OUT OF STPs?
Investors going for Systematic Investment plan are expected to acquire higher returns. This is because in case of an STP, to begin with, they will be investing a lump sum in a debt fund like a liquid fund. Liquid funds tend to yield higher returns in the range of 7%-9% when compared to the only 4% returns earned in a saving bank account.
The returns investors earn via STP are considered as authentic because the amount in source fund (debt fund) yields interest until investors transfer the entire amount.
The portfolio should carry out a balance between debt and equities. An STP tends to move investments from debt to equity funds and vice versa and hence re-balances the portfolio.
TYPES OF SYSTEMATIC TRANSFER PLAN
As the name implies, in this type of STP, the amount of transfers made periodically is fixed. This amount can be set according to the financial objectives and expected returns by the investor and thereafter apply for the same fixed amount.
- Capital Appreciation
The capital appreciated amount is transferred from one source fund to the desired fund in this type of STP. In this case, the capital appreciated is transferred and the capital part is saved.
- Flexi STP
Flexi STP is a flexible kind of STP. Investors are allowed to transfer a diverse amount of money from one mutual fund to another. Usually, the amount set up by the investors is based on market fluctuations.