Systematic transfer plan: Better way to play volatility
It not only allows you to invest at regular intervals but also enhances returns as the cash is invested in liquid funds, which generally offers better returns than savings bank account.
As a mutual fund investor, what do you do when you have large sum in bank account and equity markets become attractive day by day, a scenario that we are going through for almost last three months? Some of you may want to write a cheque immediately. The wiser lot will opt for a systematic investment plan (SIP) to benefit from ongoing volatility but the bit smarter lot opt for systematic transfer plan (STP).
STP allows an investor to invest lump sum amount in a scheme and periodically transfer a fixed or variable sum into another scheme. It is quite similar to SIP which is more widely known and popular of the two among the mutual fund investors. While in a SIP you invest a specified amount in a scheme at pre-specified intervals and the investment amount for every SIP tranche comes directly from your bank account, in STP the investor first invests a lump sum amount in a scheme and out of that amount a sum, usually fixed, is transferred (invested) into another scheme of the same fund house at pre-specified intervals. STP is mostly used to transfer the amount from debt funds to equity funds but can also be used vice versa.
Different types of STP
The STP facility comes with different frequencies of transfer and various types. The frequency of the transfer could be daily, weekly, fortnightly, monthly and
quarterly intervals depending on the fund house offering such facility. The main types of STP are as follows.
Fixed STP - In fixed type of Systematic Transfer Plan the amount that needs to be transferred from one scheme to another scheme is fixed and decided by the
investor at the time of starting STP.
Capital Appreciation STP - In capital appreciation STP only the profit part is transferred periodically from the source fund to the target fund and the
principal part remains unchanged and does not get transferred.
Flex STP - Flex or Flexi Systematic Transfer Plan is a facility wherein the investor can opt to transfer variable amount linked to the current value of
existing investments under Flex STP on the date of transfer at predetermined intervals from one scheme to the another scheme. In Flex STP the fixed amount is the minimum amount to be transferred, specified at the time of enrolment and the variable amount changes depending upon current value of the existing investments in the scheme. By using Flex STP you invest more money when markets are falling and consequently you buy more units in such markets and invest minimum amount in rising markets. Thus Flex STP enables you to take advantage of bearish phases in the market by accelerating your investments automatically during falling markets.
Advantages of Systematic Transfer Plan
Like SIP, STP ensures the investor the advantages of rupee cost averaging. Similar to SIP, STP makes sure that more units are bought when the equity markets are down and consequently NAV are low and fewer units are bought when the equity markets are high and NAV are high.
In an STP your initial investment in a debt/liquid scheme enhances your total returns as liquid fund brings you better return than a saving account in the
STP Enables you to rebalance your portfolio. By using an STP you can rebalance the portfolio through transferring investments from one asset class to another asset class. For example if the value of your equity portfolio exceeds the targeted allocation, you can transfer the excess amount from equity to debt through STP and if value of your debt portfolio exceeds the targeted allocation, amount can also be transferred from debt to equity through STP.
You enjoy the benefit of power of compounding.
A few scenarios when STP can be an ideal option for investment
When you want to enter the equity markets when they are highly volatile and wish to reduce your risk.
When you have a large sum in your bank account and you want to invest it in an equity fund systematically, then you can use STP to generate higher overall returns than what you will get through SIP and saving bank account. In such case you can invest a lump sum in a liquid or debt fund and can simultaneously give the necessary instructions to transfer a fixed sum from liquid/debt fund to your chosen equity fund over regular periods.
When the investor want to invest lump sum amount in schemes with stable returns and wish to take a small exposure to equity schemes in order to benefit from higher growth potential of equities.
When you are not sure of the uptrend continuing in the market going forward or when in the near term the potential upside in the market looks lower than the potential down side.
As regards to STP, it is noteworthy that you can switch between two schemes of same fund house only. Moreover, please also keep in mind that any switch transaction under STP from one scheme to another scheme attracts capital gain tax.
The author is managing director of investonline.in, a mutual fund distribution entity.