When to opt for systematic transfer plan

For those with a steady stream of income, the SIP (Systematic Investment Plans) route of investing in mutual funds helps with cost averaging. This may, however, not help those with lumpy revenue streams, or those with a lump sum. This is when Systematic Transfer Plans (STP) could come to your rescue.

What is it

STP enables investors to transfer funds from one scheme to another. Investors can periodically withdraw funds from a source scheme and invest the amount in the target/destination scheme of the same fund house. As opposed to a Systematic Withdrawal Plans (SWP), the amount withdrawn from a fund in an STP is immediately invested in another. Besides, investors also get to reap the benefits of rupee cost averaging (in the new fund), akin to an SIP.

Investors get to choose the periodicity of such transfers such as weekly, monthly, or quarterly. Investors can either opt for a fixed or flexi STP (varying amount and frequency) depending on their financial goals. Certain fund-houses permit investors to opt for capital appreciation STP, wherein only the profits in a scheme are withdrawn and invested in the other periodically. SBI Mutual Fund also permits investors to transfer dividends they receive from one scheme into another scheme, using their Dividend Transfer Plan (STP).

For STP investing, investors can fill up the required form with their respective fund houses and submit them either physically at their office or online on their website.

When to opt for STP

An STP can come in handy when you have just received a windfall or bonus and are wary of investing near the market peak. You can then prefer to invest the lump sum right away in a debt liquid fund and opt for a STP to an equity fund of the same fund house at regular intervals. In this way while you continue to earn a stable return on your lump sum, you can also make your long term equity investments in a staggered manner.

The reverse is also a good idea. Suppose you have invested for three to four years in an equity fund and want to now book profits on your investments. You can withdraw just the profits from the equity schemes using the STP route and invest them in a debt scheme of the same fund house at regular intervals.

.One can also use the STP route for de-risking their portfolio. For instance, someone with heavy exposure to thematic funds can opt for an STP and make periodical allocations to index funds.

Keep in mind

One, STPs can only be made within two schemes of the same fund-house. Lack of an eligible scheme in the preferred (target) category can be a deterrent. For instance, investors cannot opt for Mirae Asset Emerging Bluechip Fund, as a target fund in their STP. Two, be mindful of the STP conditions set by your fund house. For instance, Mirae Asset MF requires its STP investors to make a minimum of five transfers of ₹1,000 each and in multiples of ₹1 thereafter. In the case of SBI MFutual Fund, the minimum number of installments required are 12 for daily STPs and 6 for weekly STPs.

Three, be wary of exit loads. Most schemes charge exit loads on withdrawals made in less than a year’s time.

Four, don’t let taxation eat into your profits. An STP is executed as a redemption (or sale) in one mutual fund scheme and purchase in another.

Depending on your period of holding in the source scheme and the type of investment (debt or equity), the sale may attract taxes on capital gains. Five, remember STP is a means to minimise your risks.

While portfolio rebalancing and de-risking is a good idea, doing an STP from equity to debt assets at every drop in the markets might do you more harm than good. Besides, equity investments generally fetch better returns over longer horizons.

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