Exploring STP : Systematic Transfer Plans

As informed investors, we should be familiar with the different investment routes or facility of investing offered by mutual funds. You may already be aware of SIP but likewise, there are also other facilities offered by mutual funds to invest, redeem or switch between investments, which are relatively unknown. We have explored the SWP in one of our previous issues. This month, we would be exploring the STP or Systematic Transfer Plan in detail.

What is a STP?
STP is the facility that allows an investor to regularly transfer (i.e. switch) a pre-defined amount from one mutual fund scheme into another scheme. Every month on a specified date an amount you choose is transfered from one mutual fund scheme, called as the Transferor scheme, to another mutual fund scheme, called as the Transferee scheme, of your choice. The STP is similar to a Switch transaction with the difference that it is regularly done at the predefined frequency. The STPs are generally used by investors to create regular cash flows between different schemes for meeting portfolio management objectives or as part of financial planning for certain objectives /goals. The following graph clearly depicts what an STP looks like.

Options available under STP:
There are certain additional options offered by mutual funds within STP. As far as time intervals are concerned, the options generally available to withdraw are on monthly, quarterly or annual period basis. In terms of the nature/type of withdrawal possible, investors normally have two options to choose from… Fixed Plan: Wherein specific fixed amount of money can be transferred.

Capital Appreciation Plan: Wherein only the amount of capital appreciation only can be transferred and the initial investment stays protected. This option is available only under growth option and not dividend plan. One thing that investors need to keep in mind is the amount of load applicable would generally be similar as if there is a redemption from the Transferor scheme and a new investment in the transferee scheme. The tax treatment would also be on same lines.

Ways how you can use STP in your lives:
STP can help meet your portfolio management needs for achieving any temporary or long term investment objective. It is one of the many ways available for planning regular cash flows between different schemes, different asset class or scheme types. The following real life situations can help you realise the ways in which STP can be planned

  1. Mr. Vikramsingh has received good bonus and he plans to invest same into equity mutual funds instead of keeping money in bank but is cautious of investing lump-sum into equity schemes.
  2. Mr. Imran has just retired from his private job and he plans to invest in debt schemes. However, he desires to set aside some money regularly into equities to also create some wealth.
  3. Mrs. Ramakant has a sizable investment in equity. He however wants ensure that the appreciation on this equity investment be set aside into debt to also slowly build a debt portfolio while keeping the equity portion intact.
  4. The wedding of Mr. Suraj’s daughter is due in the next 2 years. He already has adequate equity investment but he feels the need to protect the investment from market risk.
  5. Mrs. Desai wants to keep maintain a fixed asset allocation on her mutual fund portfolio and is looking for a way to do that periodically. In each of these multiple scenarios, STP can be effectively used to meet your investment objectives. The STP can be a very powerful facility if we can smartly use it and incorporate it as per our portfolio and investment needs. It can potentially play a very critical role as part of a holistic financial planning for your family.

STP: Tool for Investment Strategy
As a tool, the STP facility can be effectively used to meet diverse investment objectives, financial planning needs. Some of the ways it can be used is:

A Portfolio Rebalancing and/or Asset Allocation Management tool To minimise risk of investing lump-sum in equity schemes Create debt or equity investment portfolio with time where your primary investment is in the opposite asset class To meet financial goal planning objectives like emergency funds, provisioning for maturing goal, creating wealth, reducing portfolio risks, etc.

The STP option works wonderfully when we have an STP from a Debt scheme > to a Equity Scheme. This option can be exercised when your risk appetite for equity is low or markets are volatile or the market valuations appear fair or overvalued wherein there might be some risk in the short-term. In all such situations, lump-sum investment can be confidently made in debt portfolio with a STP into equity scheme. This will work like an SIP into equity scheme while ensuring that your money is invested into a more productive instrument than bank deposit. While planning for maturing financial /life goals, STP can also be used to slowly transfer money from equity schemes to debt schemes. For eg. If you need say Rs. 25 lakh in say 2 years time, you may start an STP from an equity scheme of say Rs.1 lakh today. The idea behind this is to ensure that at the time of maturity you do not carry any risk on the amount that you need by keeping same exposed to equity market volatility.

Way forward:
These are times when as investors we should be adequately informed and aware of the options & facilities available to us. We also need to take efforts to understand these options /facilities and how they can help us in achieving our financial objectives in a better way. The STP is one such important facility. A single STP can be seen as a combination of SIP, SWP or Switch. It is upto you and your financial advisor to explore the full potential of this valuable feature available exclusively in mutual funds schemes. We should be open incorporate this to manage our wealth and thus our lives in a better way. We hope, the next time you are thinking of managing your portfolio, the idea of STP shall definitely cross your mind.

Leave a Reply