Systematic Transfer Plan (STP): Meaning, Types, Benefits, How STP Works

What is Systematic Transfer Plan?

A Systematic Transfer Plan is a plan where investors give their consent to a Fund House or Asset Management Company to periodically redeem or switch a specific amount or certain units from one scheme and invest in another scheme of the same AMC or Fund House. Therefore, at regular intervals, a certain amount/units are transferred from one scheme to another of your choice.

This scheme enables an investor to park a lump sum amount in a fund and regularly transfer a variable or fixed amount into another fund. As this transfer occurs periodically, it helps investors to gain market advantage by switching to securities when they offer higher returns and also safeguard investors’ interest during market fluctuations, to minimize the damages incurred.

The fund where the lump sum money is parked is called Source Fund which is a debt-based fund, and the fund where the money is to be transferred is called a Target or Destination fund which is an equity-based fund chosen by the investor. 

In the near past, AMC/Fund Houses allowed the transfer within the same company, but now you can transfer from an equity fund of one AMC to that of another.

Who can start an STP and How?

Going for an STP would be ideal for investors who are considering investing a lump sum amount but are not ready to do that in one go. The reason behind the same can be the volatile nature of the market and less risk appetite. Also, investors having limited resources but wanting to gain high returns by investing in the stock market can also opt for STP as they will get a fixed return on their initial investment from a debt fund, and can earn potentially higher returns from the equity fund which they are gradually switching into.

Talking about starting STP, you can approach your financial advisor or a mutual fund distributor or any AMC/Fund house and select a fund where you would like to park your money (i.e. Source Fund)  and a fund to which the transfer is taking place (i.e. Destination/Target fund). You may also get in touch with a financial expert through the ZFunds platform by downloading the app https://play.google.com/store/apps/details?id=com.zfunds.user.

The minimum sum to be parked, number of transfers, and interval differ from company to company and depend upon the STP scheme chosen. 

How does STP work?

STP is the transfer of the amount from one fund to another fund of the same AMC or the fund house. Let us understand with an example how does the STP work:

Suppose, you have been invested in a debt fund for 2 years and now you want to get the exposure to any equity fund. Assume that you have invested Rs. Rs.10,00,000 in a debt fund. Now, you need to select the equity fund in which you want to invest. After selecting the fund, you need to instruct the AMC about the frequency and total amount you want to transfer from the debt fund to the equity fund. Suppose, you gave the instruction to transfer Rs.6,00,000 in 24 months with installments of monthly frequency. So, the AMC will transfer Rs.25,000 every month from the debt fund to that equity fund.

This transfer plan is often called as STP or Systematic Transfer Plan.

Key Features 

1. Minimum Investment

As per the norms of SEBI, there is no minimum amount of investment to invest through STP. However, most of the AMC/Fund Houses require a minimum investment of INR 12,000 to go forward with this scheme. (One may confirm these limits for the selected fund from their financial advisor)

2. Lucrative & Disciplines
STP enables a planned and disciplined transfer of funds between two schemes. In most scenarios, investors initiate an STP from a debt-based fund to an Equity-based fund.

3. Entry and Exit Load
You need to do at least 6 capital transfers from one fund to another to apply for an STP. While there is no entry load, SEBI allows AMC/Fund Houses to charge an exit load that cant exceed 2%. The exit load is also applicable in case the switch is done within a specified period after the initial investment and in certain schemes only.

Advantages of Investing through STP

1. Rupee Cost Averaging

It is an effective mechanism that helps in eliminating the need to time the stock market. Under this, one need not be concerned about how much and when to invest. A certain amount of money can be invested regularly and over time it averages out the costs. Thus by purchasing more units at a lower NAV and vice versa, STP assists in averaging out the related cost of the investor.

2. Scope of Higher Returns

An investor opting for STP tends to gain higher returns because of the fact that the lump sum amount you will be investing initially in a debt-based fund like a liquid fund will generate a return ranging from 4%-6% as compared to a mere 2%-3% in a saving bank account.

3. Consistent and Steady Returns

You will get the returns of the equity-based fund you are redeeming into and at the same time earn a good return on the other part of the investment which is protected in the debt-based fund.

4. Rebalancing Portfolio
If your investment in equity goes up money can be switched from equity to a debt fund and if your investment in debt increases money can be reallocated to equity funds through an STP, thus facilitating the rebalancing of the portfolio by allotting investment from debt to equity or vice versa.

5. Risk Management

STP can also be used to shift to a less risky asset class from a high-risk asset class. To understand this, let’s assume you have started a SIP for 35 years into an equity fund for retirement planning. As you approach the age of retirement you instruct your AMC/Fund house to start redeeming a certain amount from an equity fund to a debt fund. Following this modus operandi, by the time you retire, you would have moved most of the accumulated corpus to a safer haven.

Taxability of STP

An investor should always be aware of the tax implications and exits loads on the transfer of the fund he is investing in. In the case of STP, gains from redemption from debt funds before 3 years from the date of purchase are added to the investor's income and taxed at the tax rate applicable to the investor. In case redemptions from debt funds are done after 3 years, the STP amount is taxed at a rate of 20% with the benefit of taxation. 

In case the STP is made from equity funds, the applicable tax rates in case of short term capital gains (STP within 1 year from purchase) is 15%. In case the units are switched post 1 year, the gains are taxed at the long-term capital gains tax, which is 10%. This 10% LTCG tax is only applicable if the total gains in a financial year are more than Rs. 1 Lakh.

Types of STP 

An STP is of three types, namely; Fixed STP, Flexi STP, and Capital Appreciation.

Fixed STP: In this, you take out a fixed sum of money from one investment fund to another.

Flexi STP: In Flexi STP, you have a choice to transfer a variable amount. The fixed amount will act as a minimum amount and the variable depends on the volatility in the market.

Capital Appreciation STP: In this, you take the profit/gain part out of one investment and invest it in the other. 

STP vs SIP

There many difference between STP and SIP like:

• STP is the Systematic Transfer Plan while SIP is the Systematic Investment Plan.
• STP transfers the invested amount from one fund to another of the same AMC or the fund house whereas SIP helps to invest a fixed amount of sum into a fund as per the chosen frequency.
• To avail the facility of STP, there should be a minimum of Rs.12,000 invested in a fund from which you want to transfer whereas for the SIP, the minimum investment amount is different for all the funds but for most of the schemes, it is Rs.500.

Conclusion

STP is particularly suitable for investors who have a lump sum amount and wish to invest in the market but are wary of timing the market. One must keep the following points in mind while choosing STP.

First, One needs to follow it with discipline. STP, just like a SIP, generates returns only when followed diligently and properly. Breaking STP because of slight market movements or interest rate movements will only hamper the growth in the long term.

Secondly, STP is probably the best risk mitigation strategy. It will protect one from any adverse loss to a great extent. And one should note, all risk mitigation strategies cap the loss but also reduce the possibility of high returns when the market is bullish.

Finally, One needs to analyze and understand the stages and assets they are in. For instance, it would be unwise to transfer money from equity to debt when the market is close to the bottom. Similarly, it will be counterproductive to transfer money from debt to equity when the market is closer to the peak value.
 

Frequently Asked Questions

• What is STP?

STP is a systematic transfer plan. In STP, an investor gives the instruction to the AMC to periodically redeem the units and then transfer the amount to another fund as instructed by the investor.

• How does the STP work?

STP transfer the invested amount from one fund to another selected fund of the same AMC or the fund house. It transfers the invested amount as per the frequency and amount as instructed by the investor.

• What are the advantages of STP?

STP gives the advantage of the rupee cost averaging, the scope of higher returns, risk management, and many more.

• What are the types of STP?

There are three types of STP :

1. Fixed STP
2. Flexi STP
3. Capital appreciation STP

• How STP is different from SIP?

STP transfers the invested amount from one fund to another while SIP helps to invest a fixed amount into a fund as per the selected frequency.

• What is the minimum investment for the STP?

There is no minimum investment amount required for the STP. But in order to avail the benefit of STP in most fund houses, there should be at least Rs.12,000 invested in a fund from which you want to start STP.

• Is exit load applicable while doing STP?

If the units at the time of transfer come under the period specified for the application of an exit load then the exit load will be charged on that unit, otherwise not. Like, if the fund has an exit load of 1% if the units are redeemed within one year and assuming if the units are transferred after the 6 months from the date of investment months then exit load will be charged but if the units will be transferred after 12 months, then the exit load will not be charged.

• What is the tax treatment in the case of the STP?

Tax treatment will be as per the applicable short-term capital gain tax and long-term capital tax. For equity funds, STCG is at 15% and LTCG is at 10% while for the debt funds, STCG is taxed as per the investor income tax slab rate and LTCG is taxed at 20% after indexation. Now, it depends on the type of fund and time period after which the units are transferred for the tax treatment. To know about the tax treatment for an STP, it is mentioned above in the article under the heading “Taxability of STP”.

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