Systematic Transfer Plan
What is a Systematic Transfer Plan?
A Systematic Transfer Plan (STP) in mutual funds is a strategy that allows investors to regularly transfer a fixed amount of money from one mutual fund scheme to another. It is a type of investment plan that helps investors to achieve their financial goals by gradually moving their money from one scheme to another as they approach their goals.
When an investor opts for an STP, they need to specify the source scheme, the destination scheme, and the frequency and amount of transfer. The transfer of money from the source scheme to the destination scheme is done automatically at the specified intervals, without the need for the investor to take any further action.
The STP process works by allowing investors to set up a schedule for transferring money from one mutual fund scheme to another. For example, an investor may choose to transfer a fixed amount of money from a high-risk equity fund to a low-risk debt fund every month. This process continues until the investor reaches their desired level of risk or until their investment goal is met.
Benefits of using a Systematic Transfer Plan:
There are several benefits to using an STP in mutual funds. Firstly, it allows investors to gradually reduce their risk as they approach their investment goals. This is particularly useful for investors who are nearing retirement or who have a short-term investment horizon. Secondly, it helps investors to manage their portfolio effectively by allowing them to shift their investments as market conditions change. For example, if the market is performing well, investors can shift their investments to a scheme that is likely to benefit from the market's performance. Similarly, if the market is performing poorly, investors can shift their investments to a scheme that is less likely to be affected by the market's performance.
STP also helps investors to save on taxes as the money transferred from one scheme to another is considered a “switch” and not a “redemption”. This means that the investor is not required to pay any taxes on the transferred amount.
There are three types of systematic transfer plans in mutual funds:
Fixed STP : Here investors specify a fixed amount to be transferred at regular intervals from the source scheme to the destination scheme. This fixed amount is predetermined and remains constant throughout the STP period.
Capital Appreciation STP: In this, investors transfer only the capital appreciation or profits earned from the source scheme to the destination scheme. The principal amount remains invested in the source scheme, and only the gains are moved to the destination scheme.
Flexi STP: This plan allows investors to transfer variable amounts at different intervals. The flexibility in the transfer amount distinguishes it from the Fixed STP. Investors may choose to transfer a higher amount during favourable market conditions or a lower amount during market downturns.
These three types of STPs cater to different investor preferences and market scenarios, providing flexibility and customization options.
STP is a great way for investors to gradually shift their investments from high-risk to low-risk funds. It also helps in diversifying the portfolio. It's important for investors to understand the features of STP and their goals before choosing the appropriate plan.