What is STP in Mutual Fund

What Is STP in Mutual Fund | Types, Features and Benefits

ByAbhiloans

A mutual fund investment process known as the Systematic Transfer Plan (STP) allows investors to move a set number of units from one mutual fund scheme to another on regular intervals. Investors looking to optimize returns, balance their portfolios, or properly handle risks will find it very helpful.

Depending on the current condition of the market and their financial objectives, investors can use STP to systematically move their investments from debt funds to equity funds or vice versa.

Understanding STP in Mutual Funds

When transferring the funds within the same Asset management company (AMC), an STP provides an investor to predefine the frequency, amount, and destination of the fund transfer. This method guarantees a more seamless transfer of funds between schemes while reducing the risk of market volatility. 

An STP from a debt fund to an equity fund, for example, is an option for an investor who wants to continuously improve its exposure to equity markets. This approach minimizes the impact of market fluctuations and allows investments to grow steadily.

Types of STP

STPs can be broadly classified into three types:

  1. Fixed STP: This type of STP is a fixed sum that is transferred on a regular basis. For example if you invest ₹10,000 in a debt fund and want to move ₹2,000 per month to an equity fund.
  2. Capital Appreciation STP: Only the capital gains or profits from the source fund are sent to the target fund. This ensures that while the profits are reinvested, the principal amount stays the same.
  3. Flexi STP: Depending on the condition of market or personal preferences, investors can transfer different amounts using a flexible STP. For example, you can move funds during market dips to improve equity returns.

Key Features of STP

  • Customizable Frequency: Based on their investing objectives, investors can choose a transfer frequency of daily, weekly, monthly, or quarterly.
  • Risk Management: By distributing investments over time, STPs reduce the risk of market timing.
  • Efficient Portfolio Management: STPs helps with allocating funds in accordance with changing market conditions or personal objectives.
  • Tax Efficiency: STPs can reduce tax obligations, particularly for long-term capital gains, by systematically transferring funds.
  • Convenience: Investors can schedule fund transfers, making the process seamless and hassle-free.

Benefits of STP

1. Reduces Market Timing Risk

It can be risky to make large investments in volatile markets. STP avoids this by diversifying investments and minimizing the chance of unexpected market timing. 

2. Facilitates Goal-Oriented Investing

STPs align with specific financial goals, such as wealth creation or portfolio rebalancing, ensuring a disciplined investment approach.

3. Improves Returns

Gradually shifting funds from low-risk debt schemes to higher-return equity schemes during favorable market conditions can potentially enhance returns.

4. Ensures Liquidity

Investors retain access to their principal amount in the source fund while earning returns. This ensures liquidity for emergencies.

5. Balances Risk and Reward

By moving funds systematically, STPs balance the risk-reward ratio, particularly useful during volatile market phases.

STP vs SIP

While both Systematic Transfer Plans (STPs) and Systematic Investment Plans (SIPs) involve regular investments, they cater to different needs:

  • STP: Moves funds between schemes, typically from a high-risk equity fund to a low-risk debt fund.
  • SIP: It consists of investing fresh funds into a mutual fund plan on a regular basis.

STPs are ideal for reallocating existing funds, while SIPs are better suited for building wealth over time with new investments.

How to Set Up an STP

Setting up an STP is straightforward:

  1. Choose the Source and Target Funds: Choose an equity fund as the target and debt fund as the source, or alternatively.
  2. Decide the amount and Frequency: Specify the amount to transfer and the frequency (e.g., monthly).
  3. Start the STP: By completing the process online or the STP form that the AMC has provided.
  4. Monitor and Review: Make sure your investments are performing consistently with your financial goals by regularly evaluating their performance.

Popular Funds Suitable for STP

While the choice depends on individual goals, the following categories are often suitable:

  • Source Funds: Liquid funds, ultra-short duration funds, or low-risk debt funds.
  • Target Funds: Equity funds, hybrid funds, or mid-cap funds, depending on risk tolerance and growth objectives.

Consult with a financial advisor to identify the best funds for your STP strategy.

Tax Implications of STP

While STPs offer tax efficiency, investors should note that every transfer is treated as a redemption from the source fund and a new investment in the target fund. This may attract capital gains tax:

  • Debt Funds: Transfers from debt funds are subject to short-term or long-term capital gains tax, depending on the holding period.
  • Equity Funds: Transfers to equity funds may be subject to Securities Transaction Tax (STT).

Investors are advised to consult a tax advisor for tailored guidance.

Real-Life Example of STP Usage

Assume that an investor with a capital of ₹50 lakh parked in a liquid fund. To take advantage of possible market growth the investor wants to gradually transfer this amount to an equity fund. By setting up a monthly STP of ₹2 lakh, the investor reduces risk of market timing while assuring systematic exposure to equity markets.

Who Should Consider an STP?

  • Risk-Averse Investors: Individuals seeking to reduce exposure to market volatility.
  • Goal-oriented investors: Those aiming to achieve specific financial milestones through a balanced investment strategy.
  • Seasoned Investors: Experienced investors who want to optimize their portfolios without significant risk.

Conclusion

A Systematic Transfer Plan (STP) is an excellent tool for investors looking to manage their portfolios strategically. STPs offer both potential growth and risk control by enabling systematic transfers between mutual fund schemes. Knowing the complex details of STP can help you make wise investing choices and effectively reach your financial objectives, regardless of your level of experience.

Frequently Asked Questions(FAQ)

  1. Can I modify my STP settings? 

Yes, you can modify your STP. You can do this through your AMCs, remember to check with your fund house for any applicable fees or minimum transfer amounts.

  1. What happens if I miss an STP date? 

Missed dates are usually skipped without penalties. It’s important to note that some fund houses may charge a fee for rescheduling or missing an STP date but it’s best to check with the AMC.    

  1. Are there charges for setting up an STP? 

Some AMCs may charge nominal fees, so it’s essential to review the terms.