What Is STP in Mutual Funds and Its Types

What Is Systematic Transfer Plan (STP)?

A systematic transfer plan or STP in a mutual fund is the process of transferring a specified amount from one mutual fund scheme to another at a specified frequency for a specified period. Let us understand the concept with the help of an example.

Dimple has received her annual performance bonus of Rs. 1,50,000. She is worried that if she keeps the money in her savings account, she may end up spending some or majority of the amount on an impulsive purchase. She wants to invest the amount in a staggered manner in a diversified equity mutual fund.

In the above case, Dimple can use the STP process. Through the STP process, she can park the entire Rs. 1,50,000 in a debt mutual fund like a liquid fund or money market mutual fund scheme. She can give a mandate for transferring Rs. 10,000 every month from the debt fund to a diversified equity mutual fund for the next 15 months. In this manner, using the STP process, she can invest Rs. 1,50,000 in an equity scheme of her choice. The debt scheme for parking the lump sum amount is the source fund. The equity scheme where the funds will be transferred is the destination scheme or target scheme.

Now that we understand what is STP in mutual fund and how does STP work, let us look at the types of STP.

Types of Systematic Transfer Plans

There are different types of STP plans that an investor can choose from. Some of them include the following.

1) Fixed STP

In a fixed STP, the STP amount and the frequency at which it is transferred is fixed. The example we saw in the earlier section is of a fixed STP. In this case, a fixed amount of Rs. 10,000 will be transferred monthly from the debt scheme to the equity scheme.

2) Capital Appreciation STP

In a capital appreciation STP, only the appreciation amount from the source scheme is transferred to the target scheme. For example, an investor parks Rs. 1 crore in a debt scheme and gives a mandate for transferring the capital appreciation every month to an equity scheme. In this case, every month, whatever is the capital appreciation amount generated on the Rs. 1 crore amount in the debt scheme will be transferred on the specified date to the equity scheme.

3) Flexible STP

In a flexible STP, the investor has the flexibility to change the amount to be transferred from the source scheme to the target scheme. An investor can use this benefit to their advantage depending on market conditions.

For example, in a falling stock market, the investor may decide to transfer a higher amount from a debt scheme to an equity scheme to take advantage of the falling NAV of the equity scheme. Similarly, when the market is at its peak and is overvalued, lower amounts may be transferred from the debt scheme to the equity scheme.

Benefits of Systematic Transfer Plan

Some of the benefits of STP include the following.

1) Periodic Transfer

With a one-time set-up, STP allows automatic periodic (weekly, monthly, quarterly, etc.) transfers from one mutual fund scheme to another. The periodic transfers will go on for the specified period.

2) Rupee Cost Averaging

With STP, you will be investing in the target equity mutual fund scheme over a period of time. The regular purchases will allow you to navigate market volatility and average your purchase price. With Rupee cost averaging, you will be able to buy more units at a lower NAV when the market is falling. Once the market turns around, the value of all the units purchased during the downturn at lower NAV will increase, benefitting the entire portfolio.

Should You Consider a Systematic Transfer Plan?

Whenever an investor receives a lumpsum, they can keep the money in a bank account and start a SIP in a diversified equity scheme. The other option is to park the money in a debt scheme and start an STP in a diversified equity scheme.

Some of the reasons why an investor may opt for an STP over an SIP include the following.

1) Potential for Better Returns Than a Savings Bank Account

When you keep the money in a savings account, it earns the interest rate of a savings account till it gets deployed in an equity fund through a SIP. Most banks usually pay an interest rate of 2-4% p.a., depending on the type of savings account and the balance maintained. 

In an STP, you park the money in a debt fund till it gets deployed in an equity fund. Depending on the market interest rates, debt funds have the potential to give you higher returns than a savings account.

2) Better for Impulsive Spenders

If you are an impulsive spender, you may end up spending a part or the entire SIP money maintained in a savings account. If that happens, the SIP will lapse. In such a scenario, it is better to park the money in a debt scheme and use an STP to make period transfers to an equity scheme.

Things to Consider Before Investing in a Systematic Transfer Plan?

In the earlier section, we saw some benefits of opting for an STP instead of a SIP in certain scenarios wherein you get a lumpsum cash inflow. However, before you go for an STP, you must consider an important point of tax implications.

In an STP transaction, when the money is transferred from the debt scheme, the scheme units are redeemed. With every redemption transaction, there will be capital gain tax implications. For every redemption, the capital gain will have to be calculated, and accordingly, the capital gain tax will have to be paid at the time of filing ITR.

If the debt scheme units are redeemed before a specified period, there may be an exit load. An investor must check whether there is an exit load, when it is applicable, and how much it is.

STP: A Good Way to Deploy Lumpsum Financial Resources

While SIP is a good way to deploy regular cash inflows, STP is a good way to deploy lumpsum cash inflows. An STP allows you to park a lumpsum amount in a debt scheme and automatically make periodic transfers to a diversified equity fund over a period of time. It provides benefits like Rupee cost averaging, portfolio rebalancing, etc. Thus, investments with STP for lumpsum cash inflows and SIP for regular cash inflows can help you achieve your financial goals faster than scheduled and achieve financial freedom.

FAQ's

1) How Can STP Help With Portfolio Rebalancing?

When the market is going through a correction, with STP, you can transfer funds from a debt scheme to an equity scheme to buy more units at a lower NAV. Similarly, when the market is at its peak and is overvalued, you can transfer funds from an equity scheme to a debt scheme through STP. Thus, with STP, you can do the portfolio rebalancing during any phase, whether bull market, correction, bear market, or recovery.

2) What Are Some Expenses Involved in an STP Through a Debt Fund and a SIP Through a Savings Account?

In an STP, till the money is parked in a debt scheme, it will incur an expense ratio. Compare the expense ratios of various debt schemes before choosing one for the STP.

When you keep the money in a savings account and start a SIP, there is no expense ratio in a savings account. However, banks require you to maintain a monthly average balance (MAB). If the MAB is not maintained, there will be MAB non-maintenance charges.