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.
Types of systematic transfer plans
A best systematic transfer plan can be of primarily three types:
- 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.
- 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.
- 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.
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.
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.