STP : Meaning & Benefits
Investors are becoming more and more careful now about making lumpsum investments becuase of associated potential risks. Therefore, smart investors choose Systematic Transfer Plans [STP] to mitigate these risks. In this article, we are going to discuss the term STP in detail.
meaning : What is STP?
- STP stands for Systematic Transfer Plan. STP gives a facility to investor by which the investor can transfer a fixed or variable amount or units of funds from one scheme to other at regular intervals (weekly, monthly or quarterly).
- It is a systematic transfer of funds from one asset class to another, usually debt to equity, with your desired amount and frequency. In SIP you save regularly and invest systematically, generally each month to accumulate a corpus.
- In STP you have a lumpsum, you invest this lump sum into one fund type and then transfer a fixed or a variable amount into another type of fund.
- STP just like SIP is an investment strategy. It is a risk mitigation strategy. It also saves you from doing multiple redemptions individually if you were to structure this transfer of funds, it compresses multiple redemption instructions.
Example : How STP works and mitigates risk?
- Assume you had a windfall and have 10 lacs with you. Now you want to invest these 10 lacs into equity but you do not want to invest 10 lacs in one go. It is because you do not know where the market is moving.
- So you invest your 10 lacs in debt funds (as these are safer than equity funds) and then do a systematic transfer of funds let’s say Rs. 30,000 each month to equity mutual funds.
- As equity can be volatile, you slowly and steadily transfer your funds through a span of around 3 years from debt to equity. So, you do not invest into the equity market at its high or low, you spread your investments in 3 years. This is how you mitigate your risk.
- This strategy would protect you from a larger loss in a volatile market, in the same way your money would not be fully invested in the bullish market to make maximum returns. This is better than keeping your money into your bank account and doing an SIP as your debt portion earns better returns.
Key features of stp
- STPs can be done from source scheme to destination scheme of the same fund house and hence, at initial investing stage, fund house should be selected based on the Equity scheme you want to invest in. For example: You cannot start an STP from HDFC Liquid fund to Axis Equity Fund, but an STP from HDFC Liquid Fund to HDFC Equity fund can be done.
- Entry & Exit Load : To apply for an STP, you need to do at least six capital transfers from one mutual fund to another. While you are free from entry load, SEBI allows fund houses to charge exit load up to 2%. The AMC calculates exit load based on investment tenure and fund type.
- Disciplined & Lucrative : Systematic Transfer Plan (STP) enables a disciplined and planned transfer of funds between two mutual fund schemes. In most cases, investors initiate an STP from a debt fund to an equity fund.
- Taxation on STPs : Although STP is a good strategy, we should be aware of the tax implications and exit loads on the transfer. Every transfer from one fund to another is considered as a redemption and fresh investment. The redemption is usually taxable. The money transferred within the first 3 years from a debt fund is subject to short-term capital gains tax (STCG). But even with this tax aspect, the returns earned would be higher than those in a bank account.
- STPs can be done only among open ended Mutual Fund schemes.
types of stp
1. Fixed STP
In this only a fixed amount is transferred from one scheme to another.For Example, I want to transfer Rs. 6,00,000/- from HDFC Liquid Fund to HDFC Equity Fund on monthly basis than, I have to transfer Rs. 20,000/- per month from HDFC Liquid Fund to HDFC Equity Fund.
2. Capital Appreciation STP
In Capital Appreciation STP, the investor takes only the profit part out of one fund and invests it in another. So, the amount is not fixed and depends on periodic profits. . So, the amount is not fixed and depends on periodic profits. For example, I want invest Rs. 6,00,000 for long term(10+years). The PE ratio of the market is 25 and hence i think that fall is impending. Hence i invested my money in debt fund. Now assume that i was right and the market certainly fell to a close where i can make entry to equities. I can take out 6 lakhs out of HDFC Liquid Fund and invest in HDFC Equity Fund. The risk is that if the market goes further down, my fund value will also fall.
3. flexi stp
In Flexi STP unit investor have a option to transfer variable amount. The fixed amount will be the minimum amount and the variable amount be subject to the volatility in the market. If the NAV of the fund falls investment can be increased to take advantage of falling prices and if the market moves up the the minimum amount of transfer is invested to take advantage of increasing prices. Transfer facility is available on a daily, weekly monthly and quarterly interval. the minimum amount of transfer is invested to take advantage of increasing prices. Transfer facility is available on a daily, weekly monthly and quarterly interval. For example, I want to invest Rs. 6,00,000 for long term(10+years)
- Invest Rs. 2,00,000 in HDFC Liquid Fund
- Set STP for Rs. 2000/week to HDFC Equity Fund
- (Optional) Transfer ₹4000 every time market falls by more than 1% (before 2:30 pm).
- In almost 4 years, my entire investment will move to high growth equity mutual funds, a best average price (lowest risk).
How can an investor benefit from STp?
1. Scope for higher returns
If you opt for STP, you tend to generate higher returns. It is because for an STP, you will be initially investing the lump sum in a debt fund like a liquid fund. Liquid funds are known to yield higher returns in the range of 7%-9% as compared to the mere 4% returns earned in a saving bank account.
2. Earning steady returns
The returns you earn via STP are pretty reliable. This is because the amount in source fund (debt fund) generates interest until you transfer the entire amount.
3. Managing risks
An STP can also be used to move from a risky asset class to a less risky asset class. For instance, say, you initiated an SIP for 30 years into an equity fund towards retirement planning. As you approach your retirement, you can initiate an STP to prevent loss of fund value. Here, you instruct the fund house to transfer a fixed amount from the equity fund to a debt fund. In this way, by the time you retire, you would have moved all the accumulated corpus to a safer haven.
4. Rupee Cost Averaging
Systematic Transfer Plans averages out the cost of investment by buying lesser units at higher NAV and more units at a lower cost. As your money gets transferred from the one fund to another, the fund manager would keep purchasing additional units systematically. Hence, you will get the benefit of rupee-cost averaging i.e. the per-unit cost of investment will fall gradually.
5. Re-balancing portfolio
Your portfolio should strike a balance between debt and equities. An STP re-balances the portfolio by moving investments from debt to equity funds or vice versa.
Application : Why stp?
- STP is majorly used to transfer money from debt funds scheme to Equity schemes. As during volatile markets, you may not feel confident to invest a lumpsum amount in Equities. So, in that case good strategy is to invest the lumpsum in Debt and start an STP to Equity, which spreads your investment in selected time frame. This is a good risk mitigation strategy.
- An STP can also be used to transfer funds from an equity fund to debt, when a goal for which you have been investing for a long term has come within 3 years when you would require the amount. This way you can protect your corpus from possible market fluctuation.
- The main advantage of STP is to mitigate the market timimg risk. We know that SIPs are the ideal way to invest in the equity mutual funds because of benefit Rupee-Cost Averaging. We have seen it in detail in our earlier artilcle- What is SIP? The SIP works when you have a regular income and regular savings.
- For the lumpsum investment, we are always looking to invest at the lowest price. But, it is not possible to know whether current price is high or low, compared to the future price.Therefore, the smart investor chooses to invest the lump sum in debt funds and sets STP to the desired equity fund. This way the investor’s money is getting 8-10% returns while it is getting regularly invested in equity funds.
- Many times investors would park their extra money in debt funds so as to get the higher returns than FD along with 100% liquidity. Many active investors take the advantage of sudden falling of the market due to some non-economis reasons. They set STP (with single instalment) to invest a lump sum amount in equity funds on the same day. Within a day the market corrects and comes back to pre-event levels, thus offering a great capital appreciation to their investment.
summary : points to keep in mind
- Do not stop your STP because of temporary market movement or interest rate movement.
- It would not be wise to do STP from equity to debt when the market is at its low, similarly it would not be wise to do an STP from debt to equity when the market is at its high.
- Entry load is applicable to every STP in and entry load is applicable to every STP out as per applicable to the scheme.
- Moving your money from one fund to another through STP is like selling your units from the first funds and then investing into another. So the usual tax rules apply here too.
- STP frequency can be weekly, fortnightly, month or quarterly.
- STP can be done between funds of the same fund house.
- Minimum 6 transfers are necessary in STP while minimum lump sum investment varied from fund house to fund house.
- STP can be spread over 2-3 yrs, as 2-3 years is enough to catch a market cycle.