SYSTEMATIC TRANSFER PLAN

INTRODUCTION

STP refers to Systematic Transfer Plan where in an investor invests a lump sum amount in one scheme and regularly transfers (i.e. switches) a pre-defined amount into another scheme. Every month on a specified date an amount you choose is transferred from one mutual fund scheme to another of your choice. Based on a one-time instruction, a part of the portfolio will be redeemed from one mutual fund and invested in a second mutual fund.

You have to choose a fund from which the transfer is taking place (Transferor scheme or fund) and a fund to which the transfer is taking place (Transferee Scheme or Fund). It is important to note that you can only choose from those schemes that offer the STP option. Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen by you and the options available with the AMC. The exact dates of transfer differ between asset management companies (AMCs). If you do not mention a date and frequency for the transfer, then the default STP date and frequency as decided and mentioned by the AMC is taken for the transfer.

HOW DOES STP WORK

The minimum transfer amount is dependent on the type of STP, the transfer interval and the AMC as chosen by you. The transfer takes place in the form of units of the fund. Depending upon the NAV of the transferor fund, units corresponding to the transfer amount decided are redeemed and units of the transferee fund are purchased.

HSTPs can carry Entry and Exit Loads as per the respective schemes of the various AMCs. There is no fixed entry and exit load for the STPs. You should have more than minimum investment amount in the transferor fund to start an STP

• Fixed STP: - In this fixed amount of money is transferred from one fund to another.

• Capital Appreciation STP: -In this only the appreciated amount from the investment gets transferred. However, if the appreciated amount is less than the transferred amount opted by you then it is adjusted from your original invested amount.

WHAT ARE THE TYPES OF STP’s?

With a SIP you direct a pre-decided sum regularly, say monthly or daily, to a fund of your choice. But, in the case of an STP, you invest a lump sum amount in a scheme, with an arrangement that it will be redirected to another fund picked by you. You can opt for daily, weekly, monthly or even quarterly transfer plans.

DIFFERENCE BETWEEN SIP AND STP

• STP helps you to gradually transfer your money to an equity fund while you are invested in a debt fund. Therefore, you can get the returns of the equity fund, you are transferring into and at the same time you are safe as a part of your investment remains in debt.

• STP also allows you to gradually transfer back from an equity fund to a debt fund. Therefore, when there are chances of market exhibiting a downward trend and there is huge risk involved then you can gradually transfer your investment into a debt fund. This assures safety to the investment. (However, this may be offered only by few AMCs not all the AMCs offer this advantage)

ADVANTAGES

• Some of the Equity schemes may also have a lock-in period depending on the scheme and the AMC chosen by you.

• Securities Transaction Tax (STT) is applicable on the equity funds at the time of redemption or switch to other schemes.

• Some MF houses impose a minimum monthly amount for STP and / or a minimum number of transfers.

DISADVANTAGES

Transfer of money from one MF scheme to another is treated as a sale of the units in one MF scheme and a purchase of units in another MF scheme. And whenever there is a sale of units, there is capital gains tax. So, such a transfer would result in a capital gains tax on any gain made through the MF scheme from which you are transferring your money.

INCOME TAX AND STP

Thus we can say that STP is suited to investors who want to invest lump sum into debt funds and at the same time want some equity exposure in order to gain higher returns on their investment. STP can also work as a tool to transfer from equity fund to debt scheme giving you the dual advantage: earn profits from your equity investment and preserve capital by moving into debt.

CONCLUSION

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