Here’s everything you need to know about Systematic Transfer Plans

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Investors have become increasingly reluctant of making lump sum investments today. Such investments come with huge risks that can be avoided by choosing alternate plans. This is why financial advisors recommend Systematic Transfer Plans (STP) to prevent the potential risk of losing out on your money. While you may be aware of Systematic Investment Plans (SIP), the concept of STP can come as a surprise to first-time investors. Unlike SIP which 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. It is similar to a SIP but without bank intervention.

What is a Systematic Transfer Plan?

“Systematic transfer plans move money from one scheme to another on a pre-determined date, frequency and amount. For example, moving Rs 5,000 every 7th of the month from a liquid fund to an equity fund. This ensures money is moving to the destination scheme smoothly without any bank intervention. This is a good idea for people who have lumpsum monies but want to move to the destination scheme slowly and steadily,” said Shweta Jain, CFP and founder at Investography.

So if you invest via STP in equities, it can lead you to earn risk-free returns even when the markets are vulnerable and prone to volatility. An Asset Management Company (AMC) will permit you to invest a lump sum in one fund and transfer a fixed amount to another scheme on a regular basis. Here, the former fund is known as the source scheme and the latter as target scheme.

For example, to invest Rs 5 lakh in an equity fund using STP, you have to select either an ultra short-term fund or a liquid fund. Then, decide a fixed amount that you want to transfer daily, weekly, monthly, or quarterly depending on your choice and goals.

Features of STP

There is no pre-determined minimum investment amount required to invest in the source fund to start an STP. This is a plan that enables investors to follow a disciplined and planned procedure of transferring funds between two mutual fund schemes. To apply for an STP, one is mandated to execute at least six capital transfers from one mutual fund to another.

Besides, investors are free from entry load for STPs. However, Sebi permits fund houses to charge an exit load that cannot exceed 2%. Every transfer from one fund to another is regarded as redemption and a new investment. The redemption part is taxable. The money transferred within the first three years from a debt fund is subject to short-term capital gains tax (STCG). But investors won’t mind it because the returns remain higher than those earned through banks.

Types of STPs?

There are broadly three types of STPs that investors can look to opt from. These include the following:

Fixed STP – The amount and frequency of transfer are fixed under a fixed STP. You can decide the amount basis your financial goal.

Capital appreciation – Here, only the appreciated capital can be transferred from the source fund to the destination fund while the capital part remains untouched.

Flexi STP – Unlike fixed STPs, investors can choose to transfer any amount (as per the market rate fluctuations) from the source fund to the target fund under flexi scheme.

Watch outs

The most important thing to understand before choosing an STP is this – invest only if you have a lump sum amount that won’t be required in the immediate future. While it involves minimum risks, you must be prepared to bear losses in case the market is down. Follow the approach of discipline, patience, and intelligence to get good returns under this scheme.