Systematic Transfer Plan

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ystematic Transfer Plan

“Entry and Exit both are important when it comes to selecting any investment plan”.

In case of Mutual Funds, we may enter through SIP or lumpsum mode. Similarly, for exit we do have options of SWP and Lumpsum withdrawal as exit plans. But mutual funds offer another important option to play around between entry and exit points. This is called SYSTEMATIC TRANSFER PLAN.

WHAT EXACTLY IS SYSTEMIC TRANSFER PLAN?

A Systemic Transfer Plan is an investment tool which allows an investor to invest in one scheme (Source Scheme) and then transfer funds from that scheme to another scheme (Target Scheme) and vice versa of same AMC. This is one of the tools to mitigate the volatility / fluctuations risk. Money can be parked as lumpsum in one scheme – let us say we park a lumpsum in one of the Debt Schemes of an AMC and then every week we auto-transfer some money into Equity scheme of the same AMC in bits and pieces. That way my Debt fund will keep on growing a decent pace, while slowly moving small amounts to Equity.

Now, one may wonder, why does someone want to transfer between funds of same AMC. Well, the answer is Tactical Management.

Scenario 1: If A wants to invest in Equity fund, but not all at once. So, A invests in liquid and low risk debt funds in lumpsum and then transfer parts of them at pre-determined intervals into A’s desired Equity fund of same AMC.

Scenario 2: B expects Equity market to go down. B wants to secure his investments in equity but also wants at least little return in the meantime. So, B transfers portions of his equity investment portfolio at specific intervals into debt and money market funds protecting his investments as well as getting nominal return at the same time.

Scenario 3: C has been investing for child’s university fee. C wants to take advantage of equity and has been investing in equity fund. When the goal approached, C started transferring little portions of his investment into debt funds to safeguard them.

In all the 3 scenarios, STPs are the key to transfer between equity and debt or low risk funds.

Since STP is considered redemption, long term and short-term capital gains gets applicable at each transfer which costs far less than not taking an action at all in correct time.

Some of the benefits of STP are:

  1. It helps one corpus to grow steadily, while moving some portion to other scheme
  2. It helps beat volatility
  3. Removes the burden of market timings.
  4. Automation reduces transaction burden on the Investor
  5. Helps in re-balancing the portfolio from time to time.

Thus, for many of the Goal Based solutions, it is important we use STP as a tool. However, one needs to understand that tax shall be levied on the units so redeemed under STP – either Short Term Capital Gain or Long-Term Capital Gains based on the period of holding.

So we can use this feature wisely for our benefit.

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