What is a Systematic Transfer Plan?
A systematic transfer plan allows investors to shift their financial resources from one scheme to the other instantaneously and without any hassles. This transfer occurs periodically, 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, to minimise the damages incurred.
The primary advantage of opting for an STP is the streamlined process of fund transfer and utilisation. As the money is automatically adjusted between the selected funds, investors can benefit from seamless and efficient allocation of the available resources.
A systematic transfer plan Mutual Funds can only shift the financial resources of an investor between various funds operated by a single asset management company; inter shifting between multiple schemes offered by several companies cannot be done.
Types of Systematic Transfer Plans?
A best systematic transfer plan can be of primarily three types –
- Flexible STP
Under this type of systematic transfer plans, the total funds to be transferred are determined by investors as and when the need arises. Depending upon market volatility and calculated predictions about the performance of a scheme, an investor may want to transfer a relatively higher share of his/her existing fund, or vice-versa.
- 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 investment of Rs. 12,000 to be eligible for this scheme.
A minimum of six transfer of funds is mandatory for investors to apply for investment under this scheme. Entry load on Mutual Funds are not applicable, but the exit load is charged on each transfer made. A maximum of 2% can be charged as exit fees while redemption/transfer of funds.
However, transferring resources from a liquid fund to an equity fund does not attract any charges under exit load.
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.
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 instrument. This allows an investor to ensure the safekeeping of his/her financial resources while earning stable returns at the same time.
- Rupee Cost Averaging
This method is implemented while investing in Mutual Funds via STP, allowing investors to lower their average costs incurred on investments. Rupee Cost Averaging follows the technique of investing in funds when their average price is low and selling them when their market value increases, thereby realising capital gains on the individual securities.
- Optimal balance
Top systematic transfer plans aim to create a portfolio with a mixture of equity and debt instruments, to provide an optimal combination of risk and returns. In the case of risk-averse investors, the transfer of funds is made to mainly debt securities, while equity instruments are meant for investors with an aptitude for risk.
Each transfer under the systematic transfer plan is subjected to tax deductions, provided capital gains are incurred. Redemption of the investment from such Mutual Funds before 3 years makes the gains deductible at 15% under short term gains. Long term capital gains are subject tax deductions but depend upon the annual income of the investor.
Who Should Invest in A Systematic Transfer Plan?
Investments in systematic transfer plan Mutual Funds 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 investors who want to reinvest their money in relatively safer securities such as debt instruments during times of market instability and adverse fluctuations.
Things to Remember when Investing with a Systematic Transfer Plan
Systematic transfer plan investment scheme is devised for a long term regime, and thereby, massive returns cannot be witnessed instantaneously. Investors should be prepared for this before considering this policy.
Also, an investor should have considerable knowledge about market trends and patterns if systematic transfer plans are chosen. Understanding the performance of the market value of assets, and its fluctuation mechanisms would allow investors to realise maximum yield from allocated funds.
Exit load and tax deductions should be kept in mind while calculating expected returns from systematic transfer plans. Security of principal amount and the value of returns depend upon the performance of the respective Mutual Funds itself.
Even though investments through systematic transfer plans ensure exposure to lower market risks, it cannot be entirely eliminated.
The eligibility criteria for investing in systematic transfer plan Mutual Funds are six transfers among different investment schemes, as determined by the Securities Exchange Board of India (SEBI).