Everything about Systematic Transfer Plan

In a Systematic Transfer Plan (STP), you transfer an amount from one mutual fund to another mutual fund in fixed intervals. You can only transfer funds between the mutual funds of the same company. Investors usually opt for STP when they want to transfer funds between the company’s liquid and equity funds to balance risk and returns or vice versa.

 STP is in a way similar to the Systematic Investment Plan (SIP). The only difference is that in a SIP, you transfer an amount from your bank account into a mutual fund at a fixed frequency.

 An example of  Systematic Transfer Plan (STP)

Suppose an investor is looking to move into equity mutual funds from a liquid fund to maximize his returns. He has an existing investment of  ₹ 2.4 lakhs in Aditya Birla Sun Life Liquid fund, from which he transfers his investment to Aditya Birla Sun Life Equity Fund by opting for a Systematic Transfer Plan. 

Let’s assume he opts for a frequency of 4 years involving 48 transfers. Each transfer consists of an amount of ₹5,000.

• In the first year, his investment in the liquid fund will be ₹ 1.8 lakh, while in the equity fund, it will be ₹ 60000
• The second-year will be ₹1.2 lakh each in the liquid fund and equity fund.
• The third-year will be ₹ 60000 in the liquid fund and ₹ 1.2 lakh in the equity fund.
• By the end of the fourth year, there will be ₹2.4 lakhs in the equity fund and ₹ 0 in the liquid fund. 

It is a classic example where an investor moves from a low-risk fund to a high-risk fund to improve the returns without opting for a volatile fund right from the beginning.

Types of STP 

1. Fixed STP:  As the name suggests, the investor must fix the frequency and the amount that he/she intends to transfer. This must be chosen carefully by understanding their financial goals.
2. Capital Appreciation STP:  In this type of STP, the investor doesn’t transfer the entire lump sum from the source. Instead, he/she only transfers the profit or the capital gained from the source mutual fund to the target mutual fund.
3. Flexi-STP: In this type of STP, the investor need not fix the amount while transferring from the source fund to the destination fund. You can transfer any amount to the destination fund depending on the market conditions. You would need to be in tune with the way the market is moving to benefit from a Flexi-STP.

Features of Systematic Transfer Plan

1. Investment Cap:
   There is no constraint on the minimum amount which can be transferred through an STP. But many Asset Management Companies recommend a minimum investment of ₹12,000 in the source fund. But when it comes to the number of transfers, a minimum of six transfers is mandatory.
2. Entry Load and Exit Load:
   An entry load is a fee charged from an investor for joining a fund while an exit load is a fee charged to leave the fund. For a Systematic Transfer Plan, there isn’t any entry load but the exit load depends on the duration and type of chosen fund and may not exceed more than 2%.
3. Discipline:
   A Systematic Transfer Plan helps the investor to have a well-planned and controlled transfer of funds from the source mutual fund to the destination fund.
4. Taxation:
   Every time your transfer funds from the source to the destination fund, the source fund may be subject to short-term or long-term capital gains depending upon the holding tenure.  But remember, even after taxation, good returns can be earned by following a Systematic Transfer Plan.

Benefits of Systematic Transfer Plans

Balanced Returns 

With a Systematic Transfer Plan,  an investor has the flexibility to move investment to debt/equity funds as per the market movements and individual financial needs. This would ensure the returns are balanced. 

Rupee Cost Averaging

Like a SIP, money through an STP is being invested at regular intervals and not as a lump sum, the investor gets to enjoy the benefit of cost averaging. 

For example, if the NAV was ₹14 in the first month and ₹10 in the second month, and ₹12 in the third month. Then the average amount spent will be ₹12 for each unit. If the investor had invested as a lump sum in the first month, he would have paid ₹14 for all the units.

Portfolio balancing

Since you transfer your portfolio systematically between debt and equity funds, your portfolio is a perfect balance of risk and returns. 

Consider an investor who has initiated a SIP for 40 years in an equity fund. A few years before his retirement, he can start a  Systematic Transfer Plan to move the fund from an equity fund to a debt fund to reduce his risk. By the time of retirement, he would have transferred all his funds from a risky fund to a safer fund to enjoy a risk-free post-retirement life.

Who should invest through a Systematic Transfer Plan?

Systematic Transfer Plans work well for those who are looking to balance risk and returns from their investment. If you are also someone who cannot always keep track of the market volatility, then STP is perfect for you. The best part is when you invest in STP, and you get the fixed returns from the liquid fund and higher returns from the equity fund at the same time.

Things to remember while investing using Systematic Transfer Plan

1. Though there is no minimum investment required, a minimum of 6 transactions has to be done.
2. Even though the entry load is free, the exit load will depend on the investment duration of the investor.
3. STP works well when invested over the long-term. So, an investor should not opt-out/stop the transfer plan when the market fluctuates.
4. The investor should not forget about the risk when they choose STP. Even though Systematic Transfer Plans work to reduce risk, it cannot be completely ignored.
5. You can transfer funds only between the mutual funds of the same organization (Asset Management Company). It is not possible to transfer mutual funds whose source and target organizations are different.
6. To optimize returns, choose a fund that offers a low exit load.