Investors are getting more reluctant each day making lump sum investments because of the potential risks that come attached to it. This is why financial experts recommend Systematic Transfer Plans to mitigate risks. We have covered the following in this article:

  1. What are Systematic Transfer Plans (STP)?
  2. How to Start a Systematic Transfer Plan?
  3. Features of a Systematic Transfer Plan
  4. How Can an Investor benefit from STP?
  5. Who Should Invest via Systematic Transfer Plan?
  6. What are the Types of Systematic Transfer Plans?
  7. Things to Remember While investing via STP


1. What are Systematic Transfer Plans (STP)?

Almost every investor is aware of Systematic Investment Plans (SIPs). But what about Systematic Transfer Plans or STPs? Unlike SIP, Systematic Transfer Plan may not be a term many investors are aware of. While SIP is the transfer of money from a savings bank account to a mutual fund plan, STP means transferring money from one mutual fund plan to another.

STP is a smart strategy to stagger your investment over a specific term to reduce risks and balance returns. For instance, if you invest ‘systematically’ in equities, you can earn risk-free returns even when the markets are volatile. Here, an AMC permits you to invest a lump sum in one fund, and transfer a fixed amount to another scheme regularly. The former fund is called source scheme or transferor scheme, and the latter is referred to as the target scheme or destination scheme.


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2. How to Start a Systematic Transfer Plan?

STP is a useful tool in mutual funds to average your investment over a specific period. To decide on whether one should do an STP or lump sum depends on three factors – an investor’s current allocation to equities, the risk profile of the investor and finally, the market view.

For instance, to invest Rs.1 lakh in an equity fund using STP, you may first select either an ultra short-term fund or a liquid fund. After that, decide on a fixed amount that you want to transfer daily, weekly, monthly, or quarterly. Hence, if you choose to move Rs.20,000 every three months, it will take five quarters (15 months) to complete the investment. Earlier, fund houses allowed only debt to equity fund transfer within the same company. Now, you can transfer from an equity fund of one AMC to that of another.

3. Features of a Systematic Transfer Plan

a. Minimum Investment

TThere is no standard minimum investment amount to invest in the source fund. However, some AMCs insist on a minimum amount of Rs.12,000 in their systematic transfer plans.

b. Entry & Exit load

To apply for an STP, you need to do at least six capital transfers from one mutual fund to another. While you are free from entry load, SEBI allows fund houses to charge exit load. However, the exit load cannot exceed 2%.

c. Disciplined & Lucrative

Systematic Transfer Plan (STP) enables a disciplined and planned transfer of funds between two mutual fund schemes. In most cases, investors initiate an STP from a debt fund to an equity fund.

d. Taxation on STPs

While an STP is a good strategy, you should be aware of the tax implications and exit loads on the transfer. Every transfer from one fund to another is considered as redemption and new investment. The redemption is usually taxable. The money transferred within the first three years from a debt fund is subject to short-term capital gains tax (STCG). But even with this tax aspect, the returns earned would be higher than those in a bank account.


4. How Can an Investor Benefit From STP?

a. Scope for Higher Returns

If you opt for STP instead, you tend to generate higher returns. It is because, for an STP, you will be initially investing the lump sum in a debt fund like a liquid fund. Liquid funds are known to yield higher returns in the range of 7%-9% as compared to the mere 4% returns earned in a savings bank account.

b. Earning Steady Returns

The returns made via STP are pretty reliable. This is because the amount in source fund (debt fund) generates interest until you transfer the entire amount.

c. Managing Risks

An STP can also be used to move from a risky asset class to a less risky asset class. For instance, say, you initiated a SIP for 30 years into an equity fund for retirement planning. As you approach your retirement, you can start an STP to prevent loss of fund value. Here, you instruct the fund house to transfer a fixed amount from the equity fund to a debt fund. In this way, by the time you retire, you would have moved all the accumulated corpus to a safer haven.

d. Rupee Cost Averaging

Systematic Transfer Plans averages out the cost of investment by buying lesser units at higher NAV and more units at a lower price. As your money gets transferred from one fund to another, the fund manager would keep purchasing additional units systematically. Hence, you will get the benefit of rupee cost averaging, i.e. the per-unit cost of investment will reduce gradually.

e. Re-balancing Portfolio

Your portfolio should strike a balance between debt and equities. An STP re-balances the portfolio by moving investments from debt to equity funds or vice versa.

5. Who Should Invest via Systematic Transfer Plans?

STP is an excellent choice for those looking to invest a lump sum but is not ready to do that at one go. This could be because they are risk-averse and do not want to get tangled in the market volatility. They may also be wary of equities as a rule. Such investors can opt to invest in liquid or debt funds. When this money gets transferred to an equity fund, you get the fixed returns from the debt funds as well as potential returns from the equity scheme.

6. What are the Types of Systematic Transfer Plans?

a. Fixed STP

Here, the amount and frequency of transfer are fixed. Investors can decide on this amount as per their financial goal and apply for the same.

b. Capital Appreciation

For this kind of STP, only the capital appreciated is transferred from source fund to the destination fund, and the capital part remains safe.

c. Flexi STP

As the name suggests, Flexi STP is flexible. This means you can choose to transfer a varied amount from the source fund to the target fund. Investors generally want the amount as per the market rate fluctuations. For instance, if the Net Asset Value of the destination fund dips, then you can increase the amount and vice versa.

7. Things to Remember While Investing via STP

a.Go for STP only if you have a lump sum amount to invest which you might not need in the immediate future.

b.Though the fund house decides the minimum investment, you need to make at least six STPs as per the SEBI norms.

c.STP is one of the most reliable risk-reducing strategies that investors can adopt. However, they cannot eradicate risks. You can also expect a reduction in returns if the market is low.

d. This method requires discipline. Suppose, if you opt-out of a plan just because there is a market fluctuation or change in the rates, then the purpose will behind opting for it will not be served.

e. Always keep an eye on the underlying assets and their phases. For instance, it would be irrational to transfer capital, when the market is moving to the peak.
In short, STP is a useful strategy to manage risks without affecting your returns significantly.

In short, STP is a useful strategy to manage risks without affecting your returns significantly. ClearTax Invest offers you handpicked funds from the top fund houses in the country. If you want to invest through a systematic transfer plan, then you can choose one of the plans that suit your requirements. Start investing now!


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