What is STP?
STP is a process that allows investors to transfer their funds from one scheme to another without any hassle. The full form of STP is Systematic Transfer Plan. With STP, investors can transfer funds periodically to minimize loss from one scheme and gain advantages from the other. This protects investors during extreme market fluctuations, particularly when the fund scheme chosen by the investor is performing poorly.
STP is a beneficial strategy to stagger your investments over a specific period of time in order to mitigate risks and generate balanced returns. The key advantage of STP is the seamless transfer and utilization of funds. The money is automatically adjusted between the fund schemes and the investor can benefit from all the available resources simultaneously.
An investor can opt for STP in mutual funds. STP mutual fund means transferring funds from one mutual fund scheme to another periodically. The scheme from which the funds are transferred is known as the source scheme or transferor scheme, while the scheme in which the funds are deposited is known as the target scheme or destination scheme. The funds can be transferred only in between the mutual fund schemes operated by a single fund management company.
How does STP work?
- In case you have a lumpsum investment in only one mutual fund scheme, you can transfer a part of it or the whole to other schemes as well. This allows you to use market fluctuations in your favour. For example, if your IT heavy mutual fund scheme is not performing well, you can transfer the funds to a good performing mutual fund scheme. Moreover, you can also transfer funds from a liquid fund scheme to a mutual fund scheme or vice versa. Many asset management companies also allow transferring funds to debt mutual fund schemes. All these options can be used to minimize risk and gain throughout every market condition.
- You can transfer funds only between mutual funds schemes managed by the same asset management company. Typically, 6 transfers allowed are allowed. You can avail a weekly, monthly, or yearly option. However, most funds houses do not offer the weekly transfer option.
- As per SEBI, there is no minimum investment required to start STP mutual funds. However, some asset management companies mandate a minimum investment of Rs 12,000 from the investors to be eligible for STP. Moreover, there are no entry loads in STPs but depending on the mutual fund scheme, you can be charged exit loads of up to 2 percent.
Types of STP
There are generally three types of STP - Fixed STP, Flexible STP, and Capital Systematic Transfer Plans
Fixed STP
In the case of a Fixed STP, the total amount to be transferred from one mutual fund scheme to another remains fixed as decided by the investor. The amount gets transferred automatically from the source scheme to the destination scheme.
Flexible STP
In the case of a Flexible STP, the investor is free to decide when and how much fund he wants to transfer from one scheme to another. Based on the prevailing market conditions, the investor can gauge the returns possible from one or more schemes and can plan fund transfer accordingly.
Capital Systematic Transfer Plan
In Capital STP, the gains made from one scheme are systematically transferred to any other scheme which has higher growth potential. For example, if your investment of Rs 20,000 in Scheme A has appreciated to Rs 35,000, the Rs 15,000 capital gain will be transferred to another scheme that has the potential to generate higher returns.
Benefits of STP
Investors with varying risk appetites prefer STPs for a number of reasons
Higher Returns
An STP allows you to transfer funds from one mutual fund scheme to another. This gives you the opportunity to earn from better performing schemes and pull your money out from an underperforming scheme. In this way, you can earn healthy returns even during volatile market conditions.
Risk Minimizing
During times of market corrections when most mutual funds schemes are performing poorly, you can transfer funds to relatively safer investment options like money market instruments, debt funds, etc. This helps you to keep your capital safe and minimize losses even in bearish markets.
Risk-Reward Balance
The best STPs offer investors plans that are a mixture of debt and equity instruments. This enables them to combine risk and reward in a better way. The safe investors usually transfer funds to the debt instruments, while the investors carrying a good risk appetite transfer funds to equity.
Taxation
Capital gains made from STPs are subjected to tax deductions. You can avail benefits of long-term capital gains if you hold your investments for at least 3 months.
How to Start STP
Starting an STP is quite easy. You just need to follow a few basic steps:
- Select the mutual fund scheme from which you want to transfer the funds. This will be your source scheme.
- Opt for STP and choose the fund scheme in which you want to transfer the funds. This will be your destination scheme. Note: You can only transfer funds between schemes managed by the same fund management company.
- Choose the transfer amount and transfer period.
- Confirm every detail and submit. Your STP will be initiated.
Things to consider while investing
- The ultimate aim of any STP is to minimize risks and give you the option to gain even during unfavourable market conditions. However, STPs cannot give you excessive returns over a short period of time. You should start an STP with a long term goal to see your investments grow gradually. Moreover, it is better to save money than lose it because capital saved is capital gained.
- When you are opting for an STP, make sure you have considerable knowledge about the market and its different sectors. You should also build the ability to gauge the performance of different sectors in different market conditions. Only with all this knowledge can you make the most out of STP.
- Unlike mutual funds without an STP plan, you need to be vigilant and extra careful with a running STP. You have to keep evaluating the performance of different sectors of the market and the overall market itself. Based on this knowledge, you can transfer funds across different schemes and make money even when others are failing.