Mr Roy has allocated Rs. 25 lakh in a debt fund. Over time, he wants to transfer this amount to an equity fund to achieve his financial goals. What investment method can allow him to do this?
A Systematic Transfer Plan, or STP in short, can let him transfer investment from one mutual fund to another. Mr Roy can use this method to transfer Rs. 100,000 every month into an equity fund for 25 months.
Read along to know the meaning and usage of this investment strategy.
STP allows you to periodically transfer a certain sum of money from one scheme (source scheme) to another (target scheme) at regular intervals. You can rebalance your investment portfolio with this investment method switching seamlessly between funds. It saves you effort and time by compressing multiple instructions required for redemption and subsequent re-investment.
With STPs, you can transfer your investments from a debt fund to an equity fund when the market is on a bull run. It also helps to spread your lumpsum investment over time, preventing the funds from being stuck at their peak NAV (Net Asset Value).
Conversely, you can use an STP to switch from an equity fund to a debt fund if you wish to reduce risk exposure. For example, if you’re approaching retirement and want to earn stable returns, you may opt for an STP and transfer your investments from an equity-oriented scheme to a debt-oriented scheme.
A Systematic Transfer Plan is a useful tool that allows you to stagger your investment to balance returns and reduce risk. Before starting investments via STPs, consider various factors like your risk profile, current market scenario, financial goals, etc.
Next, select the source mutual fund and the target scheme where a certain sum will be transferred. For instance, let’s say that you want to transfer Rs. 50,000 from a liquid fund to an equity fund. You can invest in the new fund via monthly STP of Rs. 5,000 over a duration of 10 months.
Options for periodic investments include daily, weekly, monthly or quarterly investments. Depending on the fund house and particular schemes, an exit load may be applicable for STPs.
Also Read – Total Expense Ratio In Mutual Funds
There are primarily three types of STPs:
In this type of STPs, the appreciated capital gets transferred to another fund while the primary capital remains intact. This allows investors to transfer profits from one scheme to another with higher growth potential.
Here, investors decide the amount and frequency of transfer, which remains fixed throughout the investment.
In this investment plan, investors get to choose a variable amount for the transfer of funds. The fixed amount would be the minimum amount, while the variable amount can depend on market volatility or the scheme’s performance.
Also Read – Top Mutual Funds For Lump Sum Investment
This concept is based on purchasing more securities when they have a lower price and lesser units when the market value surges. This reduces the per-unit cost of investment gradually, resulting in increased returns.
Having a balanced investment portfolio allows you to optimize returns and risk. STPs enable easy rebalancing as you can transfer funds from debt-oriented schemes to equity-oriented schemes and vice-versa.
Many investors use Systematic Transfer Plans to shift to less risky assets for safeguarding their portfolio from future losses. For example, if you are invested in an equity fund for a certain period and want to reduce the risk exposure, you can opt for an STP and switch to a debt fund.
A Systematic Investment Plan (SIP) is an investment strategy that involves investing a certain amount at regular intervals. On the other hand, Systematic Transfer Plans refer to transferring funds from one mutual fund scheme to another.
Here’s a tabular representation of the differences between SIP and STP:
|Basis of Comparison||SIP||STP|
|Nature of Plan||This is an investment.||This is a transfer of funds from one scheme to another.|
|Process||An individual can invest a certain amount in a mutual fund scheme at fixed intervals via an SIP.||Investors can transfer money from one scheme to another within the same AMC via STP.|
|Tax Implications||No tax is imposed on the investments. Capital gains tax is applicable upon redemption.||Tax is imposed for every transfer as the amount transferred to the target fund is basically redeemed from the source fund.|
A Systematic Transfer Plan is a useful investment strategy that helps average out the cost of buying mutual fund units. Moreover, you can use this strategy to rebalance your portfolio. However, before investing through this method, you may want to decide your investment horizon and financial goals.
Ans: Every transfer via STPs is considered to be redemption and new investment for taxation purposes. Money transferred for the first three years from a debt fund have short-term capital gains (STCG) tax applicable, while long-term capital gains (LTCG) tax is applicable for STPs for a longer period.
Ans: Investors may choose to transfer their investments to an equity fund from a debt fund when the stock market is performing well. This allows them to take advantage of market swings and maximise their portfolio returns.
Ans: SWP is an investment method for mutual funds allowing you to withdraw a fixed sum of money at regular intervals (monthly, quarterly or annually). In simple terms, this is just the opposite of a Systematic Investment Plan.
Ans: Exit load refers to a fee that a fund house may or may not impose if investors redeem their units in a mutual fund scheme before a predetermined period. To know the exit load of a specific fund make sure you read the scheme-related documents carefully before allocating your funds.
Ans: No, you cannot opt for an STP if you have been invested in an ELSS fund for 2 years. This is because ELSS funds come with a lock-in period of 3 years. You can opt for an STP and switch to a debt fund only after the completion of 3 years.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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