What is Systematic Transfer Plan and how is it different from SIP?

systematic transfer plan

a systematic relocation plan There is an automated way to transfer funds from one mutual fund scheme to another mutual fund scheme. It is generally preferred by those investors who have lump sum amount left but want to avoid market timings.

Usually, in this strategy, investors transfer funds from a debt scheme to equity.

How does this work

Suppose an investor has a fund of 10 lakh saved, but the market is volatile and he does not want to invest in equity funds right now. So the investor can buy the entire fund a . invests in debt fund Which is considered safer than equity funds and generally gives a good rate of return.

He then sets the STP for his desired equity fund. So instead of deducting money from his bank account like in SIP, funds are transferred from his debt fund to his desired equity fund at regular intervals.

So in this scenario, he not only earns the interest rate offered by the debt fund which is higher than what the bank account offers, but also can settle the amount which he can pay regularly (every month, every week). Wants to transfer to his desired equity fund. ,

Hence equity funds are credited with a specific amount at regular intervals like in case of SIP but only from debt fund account instead of bank account.

However, it must be noted that for this to work, you can choose mutual fund schemes only from the same fund house. Transfer can be done between 2 or more schemes of one fund house and not multiple fund houses. An investor can initiate an STP between 2 mutual fund schemes of Reliance Mutual Fund but not one mutual fund scheme of Reliance Mutual Fund and the other of Aditya Birla Sun Life.

Why should you invest in STP?

The main advantage of starting STP is to time the market risk-free. Equity markets can be very volatile, so investing a lump sum amount may not always be a good idea. Investing regularly increases returns in the long run due to the power of compounding.

This is why regular payments, whether SIP or STP, are more common and effective than lump sum payments for equity mutual funds. If a large corpus is invested in equity funds due to market downturn, your entire corpus will be subject to loss, however, in case of STP, this risk is reduced as only a part of your money will be invested. has gone. So far in equity funds, so your entire corpus will not feel the pinch of such loss.

Also, investing a lump sum amount in debt funds is safe as your entire corpus will not be affected by market volatility. In this way the investor’s money is investing regularly in equity funds along with giving good returns.

Who should invest?

You should invest in STP only when you have a huge amount left. If you get regular payments, you can choose the SIP route. Also, investors with low to moderate risk appetite should choose SP, if you have high risk appetite, you can invest your lump sum in equity funds. While the risks are high, the potential for return is also high.

quantity and frequency

Once you decide which debt fund you want to invest your lump sum money in, you can choose your destination funds, the frequency at which you want to transfer money from your debt, and the amount to be transferred .

Transfer options to STP – Weekly, Monthly and Quarterly.

portfolio

Your portfolio for Destination Equity Funds should be balanced, diversified as well as commensurate with your financial goals and risk appetite. If you are a low-risk investor, you can choose to shift your funds from debt funds to safer large-cap funds or index funds.

If you want a high rate of return and are ready to take the risk, you can choose between smallcap or midcap funds. Or you can also choose a mix of quality funds. Transfer some in large-cap funds, some in small-cap funds, sector funds, to keep your portfolio diversified.

STP vs SIP

While both STP and SIP involve regular investments in equity mutual funds, in SIP the money comes from your bank account whereas in case of STP it is transferred from your debt funds.

Also, STPs give higher returns than SIPs, as you are getting returns from your debt funds as well. Debt funds do not have very strong rate of return like equity funds, but they give good returns of around 10 per cent and are also protected from market volatility. In case of STP, you get the benefit of debt fund returns. In case of SIP, the bank account offers almost negligible interest rate, so you do not get that benefit.

Third, SIPs are usually open ended. There is no fixed time limit for investment. You can invest as long as you want and withdraw whenever you want. This is not the case with STP. In this, along with the amount, the time period of the transfers is also fixed. You have to choose the tenure for which you want to transfer, i.e. 6 months, on a monthly basis, then after 6 months, the transfer to your destination equity fund will stop.

In case of SIP and STP also the taxation is very different. In case of STP, every transfer from debt fund to equity fund is treated as redemption in debt fund and hence you will be liable to short term capital gains tax. This is not the case in SIP.

In SIP, you have to pay long-term capital gains tax and short-term capital gains tax based on the period for which you hold your money.

STP is the best way to invest lumpsum in equity funds, especially during volatile market environment. Not only do you get returns from equity funds but the contribution of debt funds is also quite good. However, if you do not have a large corpus, then SIP can be a better investment strategy for you.

This story was first published on mintjini and can be reached Here,