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Guide to the art of leveraging market volatility: Deep dive into Systematic Transfer Plans

Updated: Jan 22

Table of Content:

  • Introduction

  • What is a Systematic Transfer Plan (STP)?

  • Getting Started with an STP

  • Key Features of an STP

  • Benefits of STP for Investors

  • Portfolio Re-balancing

  • Who Should Opt for STP?

  • Types of STPs

  • Things to Keep in Mind While Investing via STP


Systematic Transfer Plan

Introduction

For independent mutual fund distributors looking to build and grow their own businesses,

Systematic Transfer Plans (STPs) can be a valuable tool. But what exactly are STPs, and how can they benefit both distributors and investors? Let's delve into this topic.

What is a Systematic Transfer Plan (STP)?

In the world of mutual fund investments, most investors are familiar with the Systematic Investment Plan (SIP). However, there's another key investment strategy that's gaining prominence - the Systematic Transfer Plan (STP).

STP is a method that allows investors to transfer or switch money from one mutual fund scheme to another within the same fund house. It's a strategic approach to stagger your investment over a specific period to mitigate risks and balance returns.

The fund where the lump sum amount is initially invested is known as the source scheme or transferor scheme, while the fund to which the money is transferred is referred to as the target scheme or the destination scheme.

Getting Started with an STP

To start an STP, the investor firstly invests a lump sum amount in a mutual fund, typically a debt fund like an ultra short-term fund or a liquid fund. The investor then decides on a fixed amount to move from this fund to another fund (often an equity fund) at regular intervals - daily, weekly, monthly, or quarterly.

This strategy serves to average out the cost of investment by buying more units when prices are low and fewer units when prices are high. It's an excellent tool in mutual funds to average your investment over a specific period, thereby reducing market risks.

Key Features of an STP

Minimum Investment

There is no set minimum investment amount to invest in the source fund. Some Asset Management Companies (AMCs) might insist on a minimum amount of Rs.12,000 for their systematic transfer plans, but it can vary.

Entry & Exit Load

To apply for an STP, at least six capital transfers from one mutual fund to another are required. While no entry load is levied, the Securities and Exchange Board of India (SEBI) allows fund houses to charge an exit load. However, the exit load cannot exceed 2%.

Disciplined and Lucrative

STP enables a disciplined and planned transfer of funds between two mutual fund schemes. Often, investors initiate an STP from a debt fund to an equity fund, aiming for higher returns while maintaining a balance of risk.

Tax Implications

Each transfer from one fund to another under an STP is considered as redemption and new investment. This means that tax implications and exit loads apply. The money transferred within the first three years from a debt fund is subject to short-term capital gains tax (STCG).

Benefits of STP for Investors

Potential for Higher Returns

With STP, the lumpsum initially invested in a debt fund is systematically transferred to an equity fund. This gives investors the potential to earn better returns by combining both the stable returns of debt funds plus the highe rreturns of equity funds.

Steady Returns

The returns made via STP are pretty reliable. This is because the amount in the source fund (debt fund) generates interest until the entire amount is transferred.

Managing Risks

One of the prime benefits of an STP is its ability to manage risks. It can be used to move from a riskier asset class to a less risky one, providing a safeguard against market volatility.

Rupee Cost Averaging

The systematic transfer of funds enables rupee cost averaging, where the per-unit cost of investment reduces gradually. This is because the fund manager purchases additional units systematically as your money gets transferred from one fund to another.

Portfolio Re-balancing

An STP helps in re-balancing the portfolio by moving investments from debt to equity funds or vice versa, depending on market dynamics and the investor's risk profile.

Who Should Opt for STP?

STP is an excellent choice for those looking to invest a lump sum but want to do so gradually over a period, thereby mitigating the risks associated with market volatility.

Types of STPs

STP Type

Description

Fixed STP

The amount and frequency of transfer are fixed and cannot be changed until the end of the STP term.

Capital Appreciation STP

Only the appreciated capital is transferred from the source fund to the destination fund, while the principal amount remains intact.

Flexi STP

Offers flexibility to the investor to vary the transfer amount from the source fund to the target fund based on market conditions. The investor has the flexibility to adjust the transfer amount as needed during the STP period.


Things to Keep in Mind While Investing via STP

  • STP is suitable if you have a lump sum amount to invest which you might not need in the immediate future.

  • At least six STPs are required as per SEBI norms.

  • STP cannot completely eliminate risks, and returns may reduce if the market is low.

  • It requires discipline. Opting out of a plan due to market fluctuations or rate changes defeats the purpose of STP.

  • Always be aware of the underlying assets and their phases.

In conclusion, STP is a strategic investment tool that helps manage risks while aiming for steady returns. For independent mutual fund distributors looking to empower their clients and grow their businesses, understanding and recommending STPs can be a game-changer. Leverage platforms like assetplus, which offer robust tools and resources to help you navigate and succeed in the mutual fund industry.

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