Systematic Transfer Plan (STP)

Systematic Transfer Plan (STP) is a strategy where an investor transfers a fixed amount of money from source scheme to target scheme. Explore everything about STP in this blog.
Systematic Transfer Plan (STP)
4 mins read
18 April 2024

A Systematic Transfer Plan (STP) is an investment strategy that allows investors to transfer their financial resources from one mutual fund scheme to another within the same AMC, instantaneously and without any hassles. This transfer occurs periodically, enabling investors to gain market advantage by changing to securities when they offer higher returns. Thus, it safeguards the interests of an investor during market fluctuations, minimizing the damages incurred. In this article, you will explore the Systematic Transfer Plans meaning, types of Systematic Transfer Plans, Systematic Transfer Plans features and many more in detail.

What is STP in mutual funds?

STP, or Systematic Transfer Plan, is a strategic tool within mutual funds that allows you to automatically shift money between different schemes offered by the same fund house. Imagine a bridge between two investment pools. You set a fixed amount or number of units to be periodically transferred from a ‘source scheme’ (often a debt fund) to a ‘target scheme’ (often an equity fund). This offers several benefits:

Types of systematic transfer plans

A best systematic transfer plan can be of primarily three types:

  1. Flexible STP: This form of systematic transfer plan offers investors the flexibility to decide the total funds to be transferred based on their immediate requirements. Depending on market dynamics and informed predictions regarding a scheme's performance, an investor might opt to transfer a larger or smaller portion of their existing fund. The fixed amount represents the minimum transfer, while the variable amount can be influenced by market volatility or the scheme's performance.
  2. Fixed STP: In case of a fixed systematic transfer plan, the total amount to be transferred from one mutual fund to another remains fixed, as decided by the investor.
  3. Capital systematic transfer plans: Capital systematic transfer plans transfer the total gains made from market appreciation of a fund to another prospective scheme with a high potential for growth.

Features of a systematic transfer plan

  • SEBI mandates no minimum amount of investment to invest through systematic transfer plan mutual funds. However, most asset management companies require a minimum amount of Rs. 12,000 to be eligible for this scheme.
  • A minimum of six transfers of funds is mandatory for investors to apply for investment under this scheme.
  • Entry load on mutual funds is not applicable, but the exit load may be charged on each transfer made depending on the exit load structure of the scheme.
  • The exit load varies for each scheme, with a maximum of 2% applicable during fund redemption or transfer. Certain schemes do not impose any exit load for systematic transfer plans (STPs).
  • STPs are taxed like any other mutual fund investment.

Benefits of a systematic transfer plan

There are several characteristics of a systematic transfer plan mutual funds which makes it an attractive option for investors with varying risk appetite:

  • Higher returns: STPs allow you to earn higher returns on your investments by shifting to a more profitable venture during market swings. Gaining market advantage in this method maximises the profits through securities bought and sold in the capital sector.
  • Stability: During times of high degree of volatility in the stock market, investors can transfer their funds via an STP into relatively safer investment schemes such as debt funds and money market instruments.
  • Disciplined approach: STP enables a disciplined and planned transfer of funds between two mutual fund schemes.

How do systematic transfer plans work?

A systematic transfer plan or STP allows you to periodically transfer (switch) a certain amount of units from one mutual fund scheme to another mutual fund scheme of the same mutual fund house. You may consider an STP from an equity scheme to a debt scheme or vice versa depending on the market conditions.

Method to start a Systematic Transfer Plan

There are two ways to set up an STP as follows:

  • Offline: Fill out a Systematic Transfer Plan form and submit it to the physical office of the relevant mutual fund house (Asset Management Company).
  • Online: Nirmal Bang offers a user-friendly digital platform for a hassle-free STP setup.

STP Requirements

Regardless of the method, you will need to specify:

  • Transfer amount: The fixed amount you wish to transfer regularly.
  • Transfer date: The specific date each month for the transfer to occur.
  • Investment duration: The total period for the STP to be in effect (e.g., 2 years).

Example: An STP of Rs. 10,000 on the 16th of every month for 2 years.

Who should opt for systematic transfer plan?

Systematic transfer plans are ideal for individuals who have limited resources but want to generate high returns by investing in the stock market. It is also suitable for those who want to reinvest their money in safer securities like debt instruments.

STP – Taxation

Taxation of redemptions through STP vs regular redemption

Feature STP redemption Regular redemption
Transaction type Redemption from Source Scheme + Investment in Target Scheme Redemption from a Mutual Fund Scheme
Tax treatment Same as regular redemptions Same
Tax rates based on holding period (See table below) (See table below)


Tax rates for capital gains

Source Scheme Holding period Type of gain Tax rate
Equity funds Less than 1 year STCG 15%
Equity funds 1 year or more LTCG 10% without indexation (up to Rs. 1 lakh exempt)
Other funds (Debt, Gold etc.) Less than 3 years STCG As per investor's income tax slab rate
Other funds (Debt, Gold etc.) 3 years or more LTCG 20% with indexation

 

Conclusion

In conclusion, systematic transfer plans are an excellent way for investors with varying risk appetite to invest their money in mutual funds. They offer several benefits such as higher returns, stability, disciplined approach, and taxation benefits. By choosing an appropriate type of STP and following a planned approach towards investing, investors can maximize their profits while minimizing risks.

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Frequently asked questions

How does a systematic transfer plan help you deal with volatility?

A systematic transfer plan (STP) in mutual funds is a smart strategy to deal with market volatility. It allows investors to shift their investments from one scheme to another, typically from a low-risk fund to a higher-yielding asset. This process occurs at intervals, enabling investors to gain market advantage by changing to securities when they offer higher returns. It safeguards the interests of an investor during market fluctuations, minimising potential losses.

Is STP better than SIP?

It depends on your financial goals and preferences. SIP (Systematic Investment Plan) is suitable for regular investment in a mutual fund, while STP (Systematic Transfer Plan) is ideal for gradually moving funds from one scheme to another. SIP is about consistent contributions, while STP focuses on strategic transfers based on market conditions. Choose the one aligning with your investment strategy and objectives.

Is a systematic transfer plan good for investors?

An STP is beneficial for investors as it offers higher returns and stability during times of high market volatility. By shifting to more profitable ventures during market swings, STPs allow investors to maximize their profits. Moreover, during times of high volatility in the stock market, investors can transfer their funds via an STP into relatively safer investment schemes such as debt funds and money market instruments.

What does STP mean?

STP stands for Systematic Transfer Plan. It's a tool that lets you automatically move money between different schemes within the same fund house.

What are the benefits of STP in mutual funds?
  • Rupee-cost averaging: You invest regularly at various NAVs, potentially reducing the impact of market volatility.
  • Portfolio rebalancing: Gradually adjust your investment mix (debt to equity) as your goals or risk tolerance change.
  • Discipline: Automates your investing, ensuring consistent transfers without needing to remember.
Is STP a good option?

It depends on your goals. STP is ideal for long-term investors seeking a disciplined approach and potentially averaging out costs.

What is the minimum amount for STP?

Minimums vary by fund house, but they typically range from Rs. 500 to Rs. 1,000.

What are the disadvantages of STP in exit loads?

Some source schemes might have exit loads, which are fees charged for redeeming units within a specific period. These can affect your overall returns.