What is a Systematic Transfer Plan or STP?
As an investor, you are able to invest a lump sum amount in a scheme and regularly transfer a fixed or variable amount in another scheme. During volatile markets, an STP helps you to periodically transfer funds from one scheme (source scheme) to another (target scheme) in a single instruction, without having to give the AMC multiple instructions to redeem and reinvest.
When the markets are doing well the transfers generally are made from debt to equity and vice versa if the market is not performing well. If a fixed sum is transferred from the source to the target scheme, then it's called Fixed STP, and if the sum transferred is the profit part of the investment of source scheme, then it’s called Capital Appreciation STP.
Types of Systematic Transfer Plans
Capital Appreciation: Only the capital appreciated is transferred from source fund to the destination fund
Fixed STP: The transfer amount pre-decided by the investor is periodically fixed depending on his financial goals.
Flexi STP: As the name suggests this plan is flexible where you can choose to transfer different amounts depending on the market volatility from the source fund to the target fund.
Features of a Systematic Transfer Plan
There is no entry load when you are transferring your capital but SEBI or Securities Exchange Board of India allows fund houses to charge exit load up to 2% and the AMC or Asset Management Company calculates the exit load based on your investment tenure and fund type. An STP enables discipline and planned transfer between two mutual fund schemes. Each transfer you make from or to another fund is considered as a fresh investment and is subject to tax. If you move your capital from a debt fund it will be subject to short-term capital gains tax.
How is it beneficial?
You can earn steady returns if you invest via STP because the amount in the source fund will continue to generate interest until you transfer the entire amount. You will be able to manage risks by moving your funds from a risky asset class to a less risky one, hence helping you rebalance your portfolio. While your money is getting transferred from one fund to another fund, your fund manager will continue to purchase additional units, therefore, giving you the rupee-cost averaging.STP is an amazing choice for investors who want to invest in a lump sum but don’t want to invest them all at once.