Are you utilising the STP/SWP options wisely?
We all know that mutual funds are one of the most efficient means to take exposure to the equity markets for the following advantages which they offer:
- Professional management
- Lower entry level
- Economies of scale
- Innovative plans and services
And if we closely assess all the aforesaid points, one would realise that mutual funds actually help in reducing the overall risk to your portfolio.
In today's dynamic market scenario, while one may aim to take advantage of favourable scenarios in both equity and debt markets, there is an inherent risk involved. Thus while you take exposure to these respective asset classes it is important to adopt caution and do it smartly and prudently.
Very often while reallocating assets within categories of mutual funds, investors tend to give redemption request forms and then invest into another mutual fund scheme as they deem fit, rather than using the options such as Systematic Transfer Plans (STPs) and Systematic Withdrawal Plans (SWPs) offered by mutual fund houses.
Under STP, a lump sum amount earlier invested by you can be transferred at regular intervals in a piecemeal manner systematically into another mutual scheme (as desired by you) of the same fund house. Typically 6 such transfers are allowed by the fund houses. Also, most funds houses generally allow an STP from a debt mutual fund scheme to an equity mutual fund scheme, and only handful of them allow it vice versa. Likewise, most fund houses allow a monthly or a quarterly option, while a handful of them allow even a weekly or a quarterly option. Moreover different fund houses have different requirements for the minimum amount to be invested through STP.
There are broadly 3 types of STP options available with you:
- Fixed STP - In this type of STP, the amount to be transferred is fixed (which is predetermined by you at the time of investment), which gets transferred to the desired (i.e. target) mutual fund scheme.
- Capital Appreciation or Profit generated - Under this STP option, the capital appreciation or the profit generated on your principal amount gets transferred to the target fund and the capital part remains safe. Hence, this option works well if one intends to book regular profits and plough them into debt mutual fund schemes from the same fund house.
- Flexi or Variable STP - Under Flexi STP you have a choice to transfer variable amount. The minimum amount under this STP option is fixed, but subject to volatility in the market the variable amount is decided. If the NAV of the target fund falls, investment can be increased to take benefit of falling prices and likewise if the market moves up, 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.
Thus from an asset allocation point of view also if we assess it is indeed an useful option/tool which enables one to gradually shift between debt and equity. Thus say if you would prefer to stay invested in liquid funds today, but going forward you also want to take a gradual exposure towards equity (as you perceive them to do well), you can certainly opt for the STP option offered by mutual funds. Likewise, if you expect the markets to undergo a corrective phase, and thus as a smart move you prefer gradually disinvesting from equity mutual funds, then you can opt for an STP from your equity fund and transfer into a liquid fund. Hence this convenience offered by STP enables you to:
- Rebalance your portfolio; and
- Take advantage of the market scenario
Also, while you plan some of your important financial goals such as buying your dream home, getting married, children's education, their marriage, your retirement, etc.; STP can be of great utility because it can help you to shift gradually from equity to debt as you are near to your financial goals.
But while you opt for an STP, for benefits it offers, you also got to be cognisant about the cost and tax implications.
- Loads: While you exit (i.e. withdraw) from one scheme into another, the exit loads would be applicable if your transaction falls under the criteria which enforces you to pay the same. Thus the exit load of the scheme from where you are transferring will be levied and thereby an impact of the same in the form of number of units would be noticed in target scheme, if you are transferring during the period when exit load is applicable.
- Taxation: While you transfer your investments from a mutual fund scheme to another, the Income Tax Act, 1961 construes it to be sale transaction, and thus the provisions of the Act apply as well. Likewise, a Securities Transaction Tax (STT) will be levied at the time of exit i.e. from an one equity oriented fund to a debt scheme, or even another equity mutual fund scheme (of the same fund house). However, for transfer from debt mutual fund schemes to equity oriented mutual fund scheme, STT is not levied.
Now, that you have understood the STP facility provided by the mutual fund houses, it is imperative at this stage that you must know another facility know as Systematic Withdrawal Plan (SWP). Under the SWP facility you can give instruction to the fund house to withdraw a predetermined amount from a particular mutual fund scheme. The withdrawal amount can also be directed by you to be transferred directly to your bank account.
Let us understand this, by an example.
Assuming that in your post-retirement life you have accumulated a good corpus to take care of your post-retirement life. But at this stage it would not be wise enough to withdraw all of your money at one-go. Instead, you can avail the SWP facility wherein you can give a standing instruction to the mutual fund house to withdraw a particular amount at regular intervals. Thus, SWP takes care of two things; one it gives you a steady flow of income; second it does not burden you with a lump sum amount at your disposal.
Types of SWP:
- Fixed withdrawal: Under this option, you can fix the amount you wish to withdraw with the mutual fund house.
- Appreciation withdrawal: Under this option only the appreciated amount on your investment is available for withdrawal.
Thus, the next time you wish to transfer your funds from one mutual fund scheme to another or wish to withdraw small amounts regularly keep in mind these simple yet effective options provided by mutual funds.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm”.