How Mutual Fund Systematic Transfer Plans or STPs work

Systematic Transfer Plan (STP) is a smart mutual fund investment mode by which an investor is able to transfer a fixed or variable amount from one mutual fund scheme to another within the same asset management company (AMC).

Mutual Fund Systematic Transfer Plan (STP) is mainly used by investors to transfer from debt mutual funds to equity mutual funds. If you are investing for the long term and at the same time, are concerned about short term market volatility or high valuations in the market, you can invest your capital in a low risk debt mutual fund (e.g. liquid, ultra-short term debt fund) and use Systematic Transfer Plan (STP) to redeem fixed amounts from your debt / money market mutual fund and transfer the proceeds in a defined frequency, daily, weekly, fortnightly or monthly, to equity mutual funds on a regular basis over several months or year/s. Mutual Fund STP ensures rupee cost averaging of purchase price for the destination scheme along with liquid fund/ ultra-short term fund returns on the money parked in the debt. Liquid scheme.

On the other hand, if you are nearing your financial goals, want to benefit from rising market and at the same time, are nervous about a market correction is imminent, you can withdraw fixed amounts from your equity fund and transfer to your income fund using an Systematic Transfer Plan.

Types of Systematic Transfer Plan

There are basically three types of Systematic Transfer Plan (STPs):-

  • Fixed Systematic Transfer Plan – Here you can transfer a fixed amount at regular intervals from one scheme to another within the same AMC
    You can try this STP Calculator and see how it works
  • Capital Appreciation Systematic Transfer Plan - Here you can transfer the profit of a scheme at certain intervals and transfer it to another scheme of the same AMC
    You can try this Profit Transfer STP calculator and see how it works
  • Dividend Transfer Plan - Here you can opt to transfer your dividends declared in a scheme to some other scheme in the same AMC

How does Systematic Transfer Plan works in Mutual Fund?

For long term investors equity is the best investment asset class. While volatility is an intrinsic aspect of equity asset class, it can be very stressful for new investors and even experienced investors. Mutual Fund Systematic Transfer Plan (STP) is your defence mechanism against adverse impact of market volatility because you can harness the benefit of rupee cost averaging.

Let us understand with the help of an example.

Suppose you want to invest Rs 1 lakh in an equity fund but are worried that the market levels in the next one year. You can invest the money in a liquid fund and use STP to transfer equal amounts to the equity fund of the same AMC every week, fortnight or month. Let us assume that the liquid fund gives an annualized return of 7%. The table shows how the Mutual Fund STP will work over the next 12 months (NAVs are purely illustrative).

You can see that the equity mutual fund Net Asset Value increased from Rs 100 to Rs 110 over the course of the year, but it was volatile on a month on month basis. If you had invested your money in the equity fund in lump sum, you would have purchased 1,000 units and the value of your investment at the end of the year would have Rs 110,000. However, using Mutual Fund Systematic Transfer Plan you were able to purchase additional 40 units (total 1,040) and the value of your equity investment was Rs 114,414; so you made an additional Rs 4,414 through systematic transfer plan.

This is not all. You also had a balance of Rs 3,355 in your liquid fund. Your total investment value at the end of the year was Rs 117,769. Therefore, you were able to make an additional profit of Rs 7,769 through rupee cost averaging of the units and also through making your money productive by investing in the liquid fund during the tenure of the Systematic Transfer Plan.

Predicting short term market movements is extremely difficult, and this is where Systematic Transfer Plan is very useful in helping you to optimize the return on your investment. If you are rebalancing your portfolio to shift your asset allocation as per your financial objectives and risk tolerance levels, you should evaluate if you want to use Systematic Transfer Plan to effectively manage the shift in your asset allocation.