The Buyt Desk
The systematic transfer plan can prove to be a life saviour for investors by offering a way to transfer capital accumulated in one mutual fund to another. Currently, this setup is only for the same asset management company. If you are stuck in a situation where you have invested all your money in a high-risk scheme and want to channel profit earned via that scheme to a secured investment destination, then STP gives you this option. You can redeem the fund from one scheme and transfer it to another scheme. Let’s understand it in detail.
Working Principle Of STP
STP is no different from the systematic investment plan in terms of working principles. In SIP, a fixed sum gets transferred from your bank account in the mutual fund scheme, whereas in Systematic Transfer Plan, it involves the transfer of money from one scheme to another. E.g. transfer of funds from a debt scheme to an equity scheme. However, it comes with a condition, there should be a minimum of six fund transfers from the source to the destination. And both schemes should be of the same asset management company(AMC).
Different Types Of STP
There are three types of STP based on how funds get transferred from one source to another.
Fixed STP – As the name suggests, in this plan, the investor chooses a fixed amount that he will transfer from the source scheme to the destination scheme at a regular interval of time.
Capital Appreciation STP – In this scheme, investors choose to transfer only the profit earned from the source scheme to the destination scheme. Therefore, in this format, the transfer amount may vary.
Flexible STP – The Flexi STP option facilitates investors to fix a minimum amount to be transferred from source to destination and increases it as required.
When Does The Need Of STP Arise?
STP is beneficial in two conditions
Investing In Lump Sum Amount – It is a smart move to invest a corpus received unexpectedly. However, investing a huge corpus in equity at the wrong time is a risk. The smart way to ensure safety is Systematic Transfer Plan. First, invest all funds in a debt fund, which is a low-risk option, then systematically transfer it to equity funds that align with your investment aim, appetite and time horizon.
Safeguarding Returns Got On High-risk Scheme – The equity-oriented mutual funds come with a high risk of volatile markets. Therefore, investors need to have a goal and time horizon with the equity scheme. It is possible that soon after reaching your investment goal, the market crashes unexpectedly, and you lose everything. This can be warded off by shifting the fund from a high-risk equity scheme to a low-risk debt scheme.
What Is Taxation Criteria With STP?
STP comes under tax implication, therefore, an investor using the Systematic Transfer Plan option must be aware of this. In STP, each transaction made is considered a redemption. It means every transaction is taxable. Check the taxation terms and conditions for STP to avert any adverse tax implications.
