Mutual funds have become one of the most popular investment instruments as it offers investors the option to invest systematically and multiply their investments over time. One of the features of mutual funds is the investment through Systematic Investment Plans (SIPs), which allow regular fixed investment in a specific mutual fund scheme. However, due to market volatility or shit in investor goals, it is a common practice to transfer funds or units from one mutual fund scheme to another to either make more returns or decrease the overall risk.

If you are a mutual fund investor, it is vital to know about systematic transfer plans (STPs), as they can help you optimise your returns. This blog will help you understand what systematic transfer plans are and how they can help you invest more efficiently in mutual fund schemes.

• STP allows investors to transfer fixed amounts or units from one mutual fund scheme to another at chosen intervals.
• STP offers various transfer frequencies, such as daily, weekly, monthly, or quarterly.
• Investors use STP to either make more returns or reduce the overall risk.

A systematic transfer plan (STP) meaning refers to a facility that allows mutual fund investors to transfer a fixed amount or units from one mutual fund scheme to another at regular intervals. Investors can choose the frequency of transferring the units from a host of intervals such as daily, weekly, monthly, or quarterly. STP allows investors to shift their funds/units to other schemes to either make more profits or reduce the chances of losses due to market fluctuations. However, investors can only use the STP facility to transfer funds/units between mutual fund units of the same asset management company.

Here are the types of systematic transfer plans:

Flexible STP

In a flexible STP, investors can choose the total funds/units to be transferred as and when they want. Generally, flexible STP is utilised by investors during market volatility to transfer funds to less risky mutual fund schemes.

Fixed STP

A fixed STP is a type of STP in which a fixed amount or units are transferred from one mutual fund unit to another of the same asset management company.

Capital STP

A capital STP is a type of STP where total profits made in one mutual fund scheme are transferred to another mutual fund scheme with a higher growth potential.

Although the Securities and Exchange Board of India (SBI) has no minimum fund requirement for STPs, most mutual fund houses require investors to invest a minimum of Rs. 12,000 in their MF scheme and make a minimum of six transfers to be eligible for the STP facility. Entry load on such transfers is not applicable, but mutual fund houses may charge a maximum of 2% as exit load when transferring the funds apart from transfers made from a liquid mutual fund to an equity mutual fund.

Here are the benefits of systematic transfer plans:

Higher returns

Investors can earn higher returns by transferring their funds/units to a mutual fund with a higher return potential. For example, you can transfer funds/units from a debt mutual fund to an equity mutual fund.

Stability

Investors can transfer their funds/units from a volatility mutual fund scheme to a fund with a lower risk. This can help stabilise the overall investments and reduce the chances of losses.

Rupee-cost averaging

STPs allow investors to lower their average cost of investing in mutual funds through the rupee cost of averaging, as they can buy at a lower price and sell when the price is higher.

Ideal balance

STPs allow investors to transfer funds/units from one fund to another, ensuring an ideal balance between risk and reward.

Taxability

In case capital gains are incurred, each transfer through STP is eligible for a tax deduction under the STCG and LTCG tax.

Risk-averse investors who want to shift from low-risk debt funds to higher-risk equity funds gradually should consider a systematic transfer plan (STP). It is ideal for investors looking to reduce market volatility risk through regular, systematic transfers while benefiting from rupee cost averaging. It is also ideal for investors who want to rebalance their mutual fund portfolio over time.

As STPs are designed for long-term growth, it is important to have patience; returns are best seen after a certain time. You should regularly monitor your mutual fund investments and consider the STP facility if you feel you can earn higher returns in a different scheme or reduce your risk level. Lastly, consider the eligibility criteria set by the mutual fund house for STP.

Systematic transfer plans (STPs) allow investors to easily transfer funds/units from one mutual fund scheme to another to either earn more returns or reduce risk. If you feel that you may need to rebalance your portfolio over time, consider investing through STPs. Now that you know all about STPs, you can make better investment decisions.