Understanding Systematic Transfer Plan

You are planning to invest in different mutual fund schemes over a period of time but want to avoid paper work involved from time to time. Don’t worry about the hassle and the potential paper work that you may have to undergo. You have a one stop solution in form of Systematic transfer plan (STP). STP is a facility offered by mutual funds to investors to periodically transfer their investments from one fund to another HDFC Mutual fund website describes STP as ,’ STP refers to Systematic Transfer Plan where in an investor invests a lump sum amount in one scheme and regularly transfers (i.e. switches) a pre-defined amount into another scheme. Every month on a specified date an amount you choose is transferred from one mutual fund scheme to another of your choice’.

How Systematic Transfer Plan (STP) works: If you wish to avail benefit of STP, you need to fill the form which is available on the website of mutual funds. Alternatively, you can also obtain the form from the distributors of mutual funds. STP can be made on monthly as well quarterly basis. It is also important to note that STP facility is available on specific dates only to the investors. Mutual funds generally provide two kinds of systematic transfer plan (STP) which are 1) Fixed Systematic Transfer Plan and 2) Capital Appreciation Systematic Transfer Plan. Two important things to note here is that STP can be done with a minimum amount which is specified by the mutual fund houses. Also minimum amount can differ from scheme to scheme. Another important thing to note is that STP tantamount to redemption of mutual fund schemes and is subject to short term as well as long term capital gains tax depending upon type of mutual fund scheme and the period of holding. Some other important points to note in case of STP are as follows:

• It is available in an open ended scheme only
• Check for exit load before you initiate STP
• Check out for time frame required to activate STP

Using STP as a strategy:  Mutual fund investors can use STP as a strategy for the purpose of investment. To start with an investor can put some money in debt fund scheme and periodically transfer money from debt to equity schemes of mutual fund. The strategy formulated in case of STP depends on the risk appetite and choice of the investor. STP can be used even to lock the value of investment. Once an investor has made good gains in an equity scheme of mutual fund, he can transfer money to debt fund and ensure that the value of investment does get eroded because of market uncertainties.