Mutual Fund’s Systematic Transfer Plan: Strategy for Safe Investment

Under Systematic Transfer Plan or STP, an earlier invested lump sum amount in a scheme can be transferred systematically to another scheme of same fund house at regular interval. In other words, under STP an investor can give instructions to mutual fund AMC to transfer a fixed sum of money or specific number of units from one scheme to another scheme on monthly, weekly or daily basis.

STP is offered in two variants – Fixed STP and Capital appreciation STP.

In Fixed STP, Investor chooses to transfer a fixed sum of money from one scheme to another while in Capital appreciation STP investor invests only a part of profit to another scheme i.e. profit earned on the principal amount is transferred to another scheme .

STP from Equity scheme to Debt scheme works best for those who want to enjoy the growth from Equity along with capital protection from debt or liquid funds.

Here are some of the benefits of STP:

1. Systematic transfer allows investors to earn capital growth with low risk.
2. It comes with advantage of Rupee Cost Averaging by buying more units at low cost in down market and vice versa.
3. It benefits Investor with dual advantage of Equity and Debt Investment and helps balance the Portfolio.
4. It helps Investor take advantage of market conditions like if market is volatile then investor can gradually transfer funds from equity to debt and vice versa.
5. It can act as a tool to achieve some of the financial goals. For example, the person who is expecting a retirement can transfer his equity investments to debt by securing money and taking advantage of equity.

There are certain conditions and procedure for starting STP and it also differs for transfers from equity to debt and from debt to equity.

Example of STP:

To understand the concept better let’s take a look at an example.

Mr. A is having lump sum amount of Rs. 72,000 which he invests through STP from fund X to fund Y for a period of one year. He plans on investing Rs. 6000 per month. Every month Rs. 6000 will be transferred to fund Y from fund X. With every transfer value of fund X will decrease while fund Y will increase with addition of gains or loss over the year.

Following figure can represent the above example, where pyramid for Fund X shows systematic decrease in value over the period of 12 months with each transfer and Fund Y pyramid value increases with each transfer.

How to make the most out of STP –

Here are some points which may help you make STP more beneficial:

1. If you have lump sum money lying idle in your saving account invest in a debt or liquid fund and make STP in a good equity fund. It’s always better than keeping it in bank account as it earning some profit.
2. It is more preferred to do STP from debt fund to equity fund when market is volatile or near peak and investment is for long term goal.
3. STP from equity to debt is more effective when your aim is to reduce risk slowly with accumulation of wealth. Invested amount in equity will remain safe with steady returns on debt fund.
4. STP is like SIP and needs systematic way to complete for better returns. Breaking STP due to short term market fluctuations can root loss.
5. Avoid doing STP in new schemes. Choose the schemes with proven track record.
6. STP in ELSS is great idea. Invest lump sum in a good debt fund and make STP in ELSS. Please do consult your advisor because ELSS comes with lock-in period and this applies to your each transfer.
7. STP is also good for rebalancing your portfolio. Combination of equity and debt can minimize your losses and risks.
8. Under STP when funds are transferred from one fund to another, each transfer is considered as fresh investment or as selling old and buying new scheme. Therefore it also comes with applicable tax and entry/exit loads.

Systematic Transfer Plan is the best strategy available after SIP if used suitably. It is one of the best risk managing strategy which works as a safe cushion against market risks.

Happy Investing!!!

See you later.

References/Credits:

• Economic Times
• Money Control
• Jagoinvestor