Systematic Transfer Plan (STP) in Mutual Funds – Types, Features & Benefits
How to handle lumpsum amounts?
Often, individuals get lumpsum cash flows in the form of asset sale proceeds, bonus from employer, full and final settlement proceeds from the previous employer, maturity proceeds of an asset, etc. If they leave this money in the bank account, they may end up spending it. If they invest the lumpsum in an equity mutual fund, there is a risk of loss due to a sudden fall in the market. In such cases, you can park the money in a debt fund and transfer money regularly in an equity scheme through a systematic transfer plan (STP).
What is a systematic transfer plan (STP)?
A systematic transfer plan allows an investor to transfer a specific amount from one mutual fund scheme to another mutual scheme over a period of time. The most common application of STP in mutual fund is parking a lumpsum amount in a debt mutual fund scheme and then transferring a specific amount to an equity mutual fund scheme over a period of time.
For example, Rajesh has opted for an STP in MF. He received Rs. 1,20,000 as a full and final settlement from his previous employer. He invested Rs. 1,20,000 in a money market mutual fund scheme. He opted for a mutual fund STP wherein Rs. 10,000 will be invested in a Nifty 50 Index Fund every month for the next 12 months.
Types of systematic transfer plans
Now that we understand the meaning of STP in mutual fund let us look at its types. Mutual fund houses usually offer three types of STPs:
Fixed systematic transfer plan (STP)
- As the name specifies, a fixed amount is transferred from one mutual fund scheme to the other mutual fund scheme. Rajesh’s scenario that we saw in the earlier section is an example of a fixed STP.
Capital systematic transfer plan (STP)
- In the case of this STP, only the profit or capital gain from one mutual fund scheme is transferred to another mutual fund scheme. Some people invest a lumpsum amount in a debt scheme with a regular payout option. The payout amount is usually transferred to an equity scheme that has a potential for higher growth.
Flexible systematic transfer plan (STP)
- In this type of STP, the investor decides the amount to be transferred from one mutual fund scheme to the other mutual fund scheme. The amount to be transferred may depend on the market conditions.
Features of a systematic transfer plan (STP)
Some of the features of an STP include:
Both schemes should be of the same fund house
- For an STP to work, the source mutual fund scheme and the destination mutual fund should belong to the same mutual fund house (AMC). So, both mutual fund schemes should belong to the same AMC.
Each STP transaction is a redemption and an investment
- When the money is transferred from the source mutual fund scheme, it will be counted as a redemption transaction. There will be capital gains tax implications for the same. When the money is transferred to the destination mutual fund scheme, it will be considered as a fresh investment. As each transfer transaction is a new investment, you should be vary of the lock-in period, if any.
Exit load from source scheme
- An exit load may be applicable when the money is transferred from the source mutual fund scheme. Check the exit load structure and opt for a scheme with no or low exit load.
Benefits of systematic transfer plans (STPs)
Some of the benefits of STPs include:
Rupee cost averaging (RCA)
- Like systematic investment plans (SIPs), STPs also help in Rupee Cost Averaging (RCA). The difference is the source of money. The source of money in a SIP is your bank account, and in an STP, it is another mutual fund scheme. In a systematic transfer plan (STP), when the money is transferred from the source mutual fund scheme to the destination mutual fund scheme every month, the destination fund units purchase price gets averaged with monthly purchases.
- Your portfolio gets rebalanced when you transfer money from a debt scheme to an equity scheme every month using an STP. If your asset allocation requires you to reduce your debt exposure and increase your equity exposure, you can do it in an orderly manner using an STP.
Potential to earn a higher return on the portfolio
- When you transfer money from a debt scheme to an equity scheme using an STP, there is a possibility of earning overall higher returns on the investment portfolio. Equity has high risk but also has the potential to give higher returns. The more money you transfer from debt to equity, the more the potential to earn higher returns on the overall investment portfolio.
Who should invest in an STP?
Any investor who has received a lumpsum amount and wishes to invest small amounts in an orderly manner over a period of time may opt for an STP. An STP helps you take care of market volatility as the amount gets transferred from one scheme to the other scheme every month over a period of one to two years or whatever time frame you decide.
An individual may have got a lumpsum amount from any of the following sources:
- Asset sale proceeds such as the sale of a flat, plot, etc.,
- Bonus from the employer such as Diwali bonus or annual performance bonus,
- Full and final settlement proceeds from the previous employer, which may include last month's salary, leave encashment, gratuity, etc.
- Maturity proceeds of an asset such as bank fixed deposit, recurring deposit, bonds, debentures, National Savings Certificate (NSC), Public Provident Fund (PPF), etc.
Things to remember when investing with STP
When opting for an STP, you should remember the following things:
- Both the schemes should be of the same AMC
- There may be an exit load for transfer from the source mutual fund scheme
- There may be a lock-in period for the destination mutual fund scheme
STP is an excellent resource for investing a lumpsum amount
In this article, we have understood what STP is, its types, features, and benefits. While STP has many benefits, the key benefit is investing a lumpsum amount in an orderly manner over time. You can invest the lumpsum amount in a debt mutual fund scheme and transfer a specified amount every month in an equity mutual fund scheme over a period of time. It will help you brace market volatility and give you the benefit of Rupee Cost Averaging (RCA). Thus, STP is an excellent resource for investing a lumpsum amount.