What is Systematic Transfer Plan?

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  • 02 Jan 2024
What is Systematic Transfer Plan?

Key Highlights

  • The Systemic Transfer Plan facility helps to ensure that funds are disbursed regularly.
  • This means this is a computerised way of transferring money from one mutual fund to another.
  • In cases where an individual wishes to invest a lump sum but does not wish to take market timing risks, this plan is preferred.
  • One of the smartest ways to do a systematic transfer plan is by transferring money from a debt fund into an equity fund.

A systemic transfer plan allows investors to swiftly and easily shift their financial resources between the two schemes with no difficulty. Such transfers will be carried out regularly, allowing investors to gain market advantage by switching to higher-return securities. It protects the interests of investors to reduce losses caused by market volatility.

A streamlined process for transferring and using funds is one of the main advantages of STP. Investors can benefit from a seamless and efficient allocation of available resources when the money is automatically adjusted between the selected funds. A Systematic Transfer Plan Mutual Funds can only transfer the financial resources of an investor among different funds managed by one Asset Management Company, it can not be possible to switch between various schemes offered by a number of companies.

The features of a systematic transfer plan are as follows.

  • The source fund does not have a fixed minimum investment amount. However, some asset management firms require a minimum of Rs 12,000 when they plan to distribute their funds systematically.
  • For a systematic transfer plan to be applied for by the investor, they must have carried out no more than six capital transfers from one mutual fund to another.
  • As investors do not pay entry fees, SEBI provides that fund managers are allowed to charge exit fees as long as they don't exceed the 2% ceiling.

In particular, there are three types of the best systematic transfer plan.

1. Flexible STP

Under this type of systematic transfer plan, the total amount to be transferred is determined according to investors' needs and when they arise. The investor can decide to move a relatively larger share of his existing fund, or vice versa, depending on the volatility in the market and calculated forecasts of how the system will perform.

2. Capital Systamic Transfer Plans

Capital systematic transfers plan to convert the net profit from the market appreciation of a fund into another promising scheme with high growth potential.

3. Fixed STP

The overall transfer amount from one mutual fund to another will be fixed, as determined by the investor, in case of a specific Systematic Transfer Plan.

Investment in systematic transfer plans Mutual Funds are a good option for individuals with limited resources who wish to maximise their returns by investing in the stock market. This option is also suitable for investors who want to invest in relatively safe investments, such as debt instruments, during market instability and unfavourable fluctuations.

A systematic transfer plan mutual fund is an attractive option for investors with different risk appetites due to several characteristics, as given below.

1. Higher Returns

By switching to a more profitable business during market fluctuations, STPs allow you to make better investment returns. This strategy of gaining a competitive edge maximises profits by purchasing and selling assets in the capital sector.

2. Taxibility

A tax deduction will be granted for each transfer carried out as part of a systemic transfer plan if capital gains are made. Profits from these mutual funds are deductible at 15% under short-term gains if the investment is redeemed before three years have passed. Capital gains will be subject to tax deduction, but this depends on the investor's yearly income.

3. Stability

Investors may shift their funds through a Systematic Transfer Pricing Mechanism to safer investment schemes like debt funds and money market instruments when the stock market is volatile. This enables the investor to make a stable income while ensuring the security of their funds.

4. Optimal Balance

The major systematic transfer plans seek to build a portfolio with a mix of equity and debt instruments to ensure an optimum combination of risk and returns. For risk-averse investors, funds transfer is mainly to debt securities, while equity instruments are intended for investors with an aptitude for risk.

5. Rupee Cost Averaging

This method enables investors to lower their average investment cost via the Systematic Trading Plan while investing in mutual funds. Rupee cost arbitrage is based on investing in funds whose average prices are low and selling them when their market price rises so that capital gains can be made from individual securities.

Conclusion

One of the most important aspects is that an Asset Management Company can carry out a systematic transfer plan between mutual funds in the same fund house. For example, one can set up a recurring transfer plan between two funds in X Fund or Y Fund house. The Systematic Transfer Plan is an efficient tool for allocating our investments over a specific period. The decision on whether to invest in STP should be made based on overall market trends, an investor's risk profile and current portfolio allocation.

FAQs on Systematic Transfer Plan

For long-term investors who would like to invest regularly, SIPs are a good choice. For the same purpose, STP may be used on the other hand. But you need to deposit a large sum of money in the fund and transfer it monthly for a certain time. Investors with a lump sum for investing are better suited to invest in SIPs.

You can reduce the risk to your portfolio and improve its stability using a systematic transfer plan. Investing only in low-risk assets can also help you increase your wealth.

Straight-through processing is an automated procedure that only involves electronic transfers and excludes human participation. Payments processing and the handling of securities transactions are its most popular uses.

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