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Systematic Transfer Plan (STP) – Meaning, Working, Types and more

Because of potential risks, investors are becoming increasingly wary about making lump sum investments. Therefore, financial experts suggest Systematic Transfer Plans for risk mitigation. We'll address everything about STP in this post.

What is Systematic Transfer Plan

A Systematic Transfer Plan is one that enables investors to consent to a mutual fund to regularly transfer a certain amount/switch (redeem) certain units from one system and to invest in another scheme from the same mutual fund house. A quantity/number of units you choose is, therefore, transmitted from one mutual fund scheme to another of your choice at periodic intervals. This facility, therefore, enables to deploy resources at periodic intervals.

How STP works

The investor must pick a fund from which to transfer and a fund to which the transfer takes place. Depending on the STP selected and the options available with the AMC, transfers can be made daily, weekly, monthly or quarterly.

Where an investor chooses to transfer from a liquid fund to an equity fund, the lump sum is invested in a short-term liquid or floating plan and transferred to a specified equity fund at regular intervals. For instance, if you have 50,000 to invest in equity; you can bring the whole quantity into a liquid plan and go through an STP for a 5,000 monthly SIP in an equity plan.

STPs may carry exit loads per AMC's respective schemes.

Types of Systematic Transfer

There are three kinds of a Systematic Transfer Plan: Fixed STP, Capital Appreciation STP and Flexi STP.

  • Fixed STP - The investor collects a fixed amount of cash from one investment to another in Fixed STP.
  • Capital Appreciation STP - The investor takes the profit portion from one investment in Capital Appreciation STP and invests in the other.
  • Flexi STP - The investor has the option to transfer a variable sum in Flexi STP. The minimum quantity will be the set quantity and the variable quantity will depend on the market volatility.

STP is, therefore, particularly appropriate for investors who have lump sum cash and want to invest in equity funds but are cautious about timing the market. Then they can choose to park the lump sum money in a liquid or debt fund and use the STP option to transfer a fixed amount of money into the target equity fund at regular intervals.

Advantages of STP

  • Consistent returns

    Through STP, while investing in a debt or liquid fund, you can move your money to a target equity fund. Therefore, you will receive the returns from the equity fund that you transfer to and at the same moment remain shielded as a portion of your investment stays in debt.

  • Cost average

    Like SIP, a set sum of money is invested at periodic intervals in the target fund, too, in STP. Since it is comparable to SIP, STP helps by buying more units at a reduced NAV and vice versa to average the price for investors.

  • Portfolio Rebalancing

    STP enables portfolio re-balancing by allocating debt-to-equity investments or vice versa. If your investment in debt increases money can be reallocated through an STP to equity funds and if your equity investment increases money can be moved from equity to a debt fund.

Taxation on Systematic Transfer Plan

The applicable tax on an STP relies on two variables – the type of fund you transfer from and the duration of your holding period. This is because a transfer from an STP is regarded as redemption and taxed accordingly.

For equity funds, transfers will be taxed at 15 percent within 1 year of acquisition under the Short Term Capital Gains Tax (STCG). Transfers after one year will be taxed at 10 percent over Rs 1 lakh under the Long Term Capital Gains Tax (LTCG).

In the case of debt funds, transfers will be taxed according to your slab within 3 years of purchase and transfers after 3 years will be taxed at 20 percent after giving you the indexation benefit. Indexation to account for inflation decreases your tax liability.

Most STPs typically come from liquid assets and are therefore taxed as per your income slab. However, the returns/earnings in these funds are also about 6-8 percent and, therefore, the real tax payable from STPs is not large. Each STP transfer is taken as part capital and part income as per the First-in-First-Out (FIFO) accounting system.

Last Words

STP is one of the most reliable approaches an investor can take to reduce risk. They can't eradicate risks, though. If the market is low, you can also expect a drop in returns.

Go for STP only if you have to spend a lump sum that you may not need soon. In brief, STP is a helpful risk management strategy without having a major impact on your returns.


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