Mutual fund Unlocked: Systematic Transfer Plan

In the current market conditions, investors are looking for various options of investment to override volatility. Mutual fund investors often use SIP’s, that is, systematic investment plans to minimise risks and losses. In the same way, STP, that is, systematic transfer plan can be a useful tool to tackle volatility.

Systematic transfer plan is a technique used for making staggered investments into equity funds over a period of time. Here investor puts a lumpsum amount into a scheme and then transfers a predefined amount into another desired scheme in specific time intervals. The scheme where an investor puts the lumpsum money is known as the source scheme, whereas the scheme to which the transfer is made is known as the target or destination scheme. This scheme is also known as transferor an transferee scheme.

The debt fund schemes have delivered good returns in the recent past, which suggests a higher return yield than that of the traditional investment avenues, so an investor with high investments can look into STP as an option to maximise returns. All that an investor needs to do is to first determine a good debt fund scheme for the lumpsum investment. Once that is done then he needs to decide the amount of transfer to the desired equity fund and the frequency to set up the STP.

If an investor is opting offline mode of investment then he will have to transfer the amount from one fund to another, where both the funds need to be part of the basket of the same fund house. And if the investor is opting through online mode then he enjoys the flexibility to transfer it to any fund under any fund house.

The major advantage of STP is that it reaps returns from the source fund which are generally higher than that of the traditional investment options. And secondly, it helps the investor in averaging cost of the investment in volatile markets just like a SIP. STP can also be used to realign the portfolio. That is, if the investment in debt funds increases, then by using STP one can easily balance their portfolio and also reap more returns than that possible in other investment options.

On the taxation front, STPs are taxed just like SIPs, that is, the investments which have completed 12 months qualify for LTCG (long-term capital gain) tax and redemptions made before a year qualify for STCG (short-term capital gain) tax of 15 per cent.