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What is a Systematic Transfer Plan (STP) in MFs and how it can help you

You are well aware of the Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) offered by Mutual Funds (MFs). But do you know what a Systematic Transfer Plan (STP) is, and how it can benefit you? Read on.

If you are a regular reader here, you would know that a Systematic Investment Plan (SIP) of an equity Mutual Fund (MF) is the best way to invest in the stock market (primarily because it offers the benefit of cost averaging and removes the element of timing the market from your investment)

(Also read: Direct investment in Stocks versus Mutual Funds)

But that is for the time when you are investing your money. Is there a way you can avoid timing the market while exiting your investment? One option is to go in for a Systematic Withdrawal Plan (SWP).

Another option is to opt for a Systematic Transfer Plan (STP) – something that can be used while making your investment or withdrawing it.


What is a Systematic Transfer Plan (STP)?

STP is a way of moving your money between investment options – you are not withdrawing your money completely, but are just moving it between two investments which are usually in different asset classes (for example, equity and debt MFs).

When you transfer your money from one investment option to another in a pre-determined way, it is called a Systematic Transfer Plan (STP). It is also popularly known as “switching” between MF schemes.


How is a Systematic Transfer Plan (STP) normally used?

An STP is normally used to transfer money between an equity MF scheme and a debt / money market MF scheme.


When should a Systematic Transfer Plan (STP) be used?


From Equity to Debt MFs

This should be used when you want to withdraw your money from the equity market.

If you withdraw your money in one go, you would be taking a risk – what if the market moves adversely (that is, what if it moves up after you sell your MF units)? You would lose the potential upside.

To remove this element of timing the market, you can use a Systematic Withdrawal Plan (SWP) – where you withdraw some money periodically over a a few months or years.

But here’s the problem: what do you do with the small amounts of money withdrawn till ALL the money is completely withdrawn for you to use? You have to think about investing it wisely, or it would just lie idle.

A Systematic Transfer Plan (STP) can come in handy at such a time – instead of withdrawing the money systematically from your equity MF scheme, you transfer it systematically to a debt scheme or a money market scheme of the MF house.

This way, you automatically invest your money while still removing it from the share market! Once all the money is transferred from the equity MF scheme to the debt / money market scheme, you can withdraw it and use it to achieve your financial goal.

(You would also like: “Goal Based Investing”)

Bottomline: You start earing from the transferred money from day 1, thus increasing your overall returns.


From Debt to Equity MFs

This is useful when you want to make a large lump-sum investment in the stock market (something that you should avoid – again, because of the issue of “timing the market”).

The best way is to invest a small amount every month through a Systematic Investment Plan (SIP) of an equity MF. But this won’t work if you have a large sum – like your bonus – to invest.

(Also read: Don’t blow away a windfall – Smart ways to spend your bonus and arrears)

In this case, you can invest the full amount in a debt / money market scheme of the MF house, and then transfer some amount to the equity scheme systematically every month. This way, your money would start investing from day 1, but will get invested in equities gradually.


Example – How does a Systematic Transfer Plan work

This is best understood using an example. Say you want to transfer2,000 from an equity MF scheme to a debt MF scheme every month.


Month 1

Equity MF units before transfer: 1,000
Debt MF units before transfer: 0

Equity MF unit NAV:20
Debt MF unit NAV:15

Equity MF units needed (redeemed from your account) =2,000 /20 = 100
Debt MF units allotted =2,000 /15 = 133.33

Equity MF units after transfer = 1000 – 100 = 900
Debt MF units after transfer= 0 + 133.33 = 133.33


Month 2

Equity MF units before transfer: 900
Debt MF units before transfer: 133.33

Equity MF unit NAV:22
Debt MF unit NAV:16

Equity MF units needed ( redeemed from your account) =2,000 /22 = 90.91
Debt MF units allotted =2,000 /16 = 125

Equity MF units after transfer = 900 – 90.91 = 809.09
Debt MF units after transfer = 133.33 + 125 = 258.33

And so on…


Income Tax (IT) and Systematic Transfer Plan (STP)

Well, transfer of money from one MF scheme to another is treated as a sale of the units in one MF scheme and a purchase of units in another MF scheme. And whenever there is a sale of units, there is capital gains tax.

So, such a transfer would result in a capital gains tax on any gain made through the MF scheme from which you are transferring your money.

(For more on capital gains, please read “Long Term and Short Term Capital Gain – Income Tax Calculation”)


Limitations of Systematic Transfer Plan (STP)

There are some limitations to STP:

  • You can transfer money between the schemes of the same fund house – you can’t move your money between two different MF houses
  • Some MF houses limit STP to the gain made by you in an MF scheme (called “capital appreciation STP”) – you won’t be able to transfer your original investment in such a case
  • Some MF houses impose a minimum monthly amount for STP (for example,1,000) and / or a minimum number of transfers (for example, 6)
  • “Exit fee” or “exit load” would apply as per the rules of the MF scheme from which you are transferring your money

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