Mutual funds (MFs) are robust vehicles in India for the wealth creation of retail investors. While monthly Systematic Investment Plans (SIPs) remain a popular choice for many investors, those with a lump sum at their disposal should consider the advantages of a Flexible Systematic Transfer Plan (commonly known as Flex STP among fund houses), especially in the current buoyant equity markets. Here’s a lowdown on choices available for Flex STP and their tax treatment to help you make informed investment decisions.
What is it about?
In a plain-vanilla STP, you initiate your investments by allocating a lump sum to an MF scheme. Subsequently, at predetermined intervals (say daily, weekly, monthly, or quarterly), a fixed amount is systematically transferred from the initially invested scheme to another within the same fund house. Generally, investors opt for overnight funds, liquid funds, or money market funds as the source schemes, shielding their investments from market volatility. Gradually, these funds are moved into equity funds.
Diverging from the conventional STP, Flex STP adapts dynamically to market conditions. It adjusts transfer amounts upward during market downturns and either maintains or reduces them in uptrends, all guided by predefined criteria. This approach allows investors to capitalise on opportunities to ramp up their equity fund allocations when markets undergo corrections.
Several Asset Management Companies (AMCs), such as SBI, HDFC, Axis, DSP, Tata, and more, offer Flex STP solutions that operate on a formula basis which calculates the Flex STP amount (Fixed amount x number of instalments minus market value of investments through Flex STP). The market value is determined by multiplying the allotted units with the prevailing Net Asset Value (NAV).
In this approach, the initial instalment adheres to a predetermined fixed amount set by the investor. Subsequent instalment amounts are determined as the higher value between the fixed amount and the formula-derived amount. This way, it accelerates investments during market downturns, while maintaining regular STP during bullish phases. Mirae Asset MF offers a similar plan called a Variable Transfer Plan (VTP), akin to the formula-based STP.
Certain fund houses like Nippon India, ICICI Prudential, Kotak, and ABSL have proprietary models utilising fundamental and technical market parameters for determining transfer amounts. ICICI Prudential Booster STP and ABSL Turbo STP employ indicators such as the Equity Valuation Index (EVI) and Equity Valuation Multiplier (EVM), while Nippon India STP+ incorporates valuation parameters and contra indicators to come up with the multiplier.
On the other hand, Kotak Smart STP uses Net Equity Allocation of its scheme, Kotak Balanced Advantage Fund (BAF). The difference lies in the multiplier range: Kotak’s range is 0.5-2x, adjustable by investors, whereas Nippon, ICICI and ABSL have fixed ranges of 0.3-3x, 0.1-5x, and 0.2-5x, respectively. It is then multiplied by the base amount (fixed) to arrive at the instalment amount (variable).
Switching between schemes within the same mutual fund house via an STP is classified as a redemption transaction and is therefore subject to taxation. Previously, debt funds served as advantageous source schemes for STPs, benefiting from indexation for Long-Term Capital Gains (LTCG) for holding period exceeding three years. However, post the amended Finance Bill in 2023, debt funds with less than 35 per cent equity holdings no longer qualify for indexation benefits. Consequently, LTCG is now taxed at the investor’s income slab rate. Some funds also have exit loads when exited quickly.
Generally, STPs are subject to certain limitations, primarily allowing transfers only between two schemes within the same fund house. This constraint may present challenges if investors cannot find a suitable scheme within their preferred category. It’s also important to note that conditions such as minimum investment and the number of instalments vary among different fund houses.
To avail the Flexi STP facility, investors can fill up the required form with their respective fund houses and submit it physically at the branch office or online on the website. STPs must be part of your overall goal orientation and asset allocation pattern, apart from cashflow requirements, and not be seen in isolation.