Understanding Systematic Transfer Plans (STPs)

Many investors feel the need for a way to transfer their funds from one mutual fund scheme to another. Instead of selling investments and then investing in the other scheme, there is a systematic way to do so through Systematic Transfer Plan (or STP).

Using an STP can be a strategic way to get closer to investment goals. In this article, we’ll explain what STPs are, the different kinds of STPs allowed, and why investors choose STPs.

What is an STP in Mutual Funds?
A Systematic Transfer Plan enables investors to transfer an amount on a periodic basis from one mutual fund scheme to another. For example, an STP can enable an investor to transfer Rs. 10,000 from a debt fund to an equity fund every month or as frequently as desired. The STP process is automatic and can be seamless and highly convenient for investors.

Investors can only opt for an STP when they’re transferring funds between different schemes of the same Asset Management Company or AMC.

Types of STP Plans
• Fixed STP – A fixed STP involves transferring a fixed amount at regular intervals from one scheme to another. The amount remains the same during each transfer.
• Flexible STP – A flexible STP enables transferring a variable amount at regular intervals from one scheme to another. The investor can decide the amount before each transfer.
• Capital STP – A capital STP allows investors to transfer capital gains from a scheme to a different scheme. For example, if an investor invests Rs. 1000 in a scheme and that scheme gains Rs. 50 in a month through investment returns, then Rs. 50 will be transferred to the other scheme.

Why Do Investors Choose STPs?
The primary reason to choose STP investments is to enable rupee cost averaging. It is usually better to spread your investment over several months rather than invest the entire amount at once.

This is because when you break your investment into smaller chunks and invest it over a longer period of time, you can average out the cost of your investments. Hence, you can avoid a situation where you invest all the money at a cost that is too high when the market was at a peak when you made the investment.

Moreover, spreading your investment over a longer period of time means that the overall cost of your investment will not depend on the exact time during which you invested. For example, if you invest over a period of a year, the overall cost of your investments will average out over the whole year.

Usually, an STP is used when an investor receives a large sum of money as a lump sum. This may be through a large bonus, a large business income, or an inheritance. In such circumstances, the investor may prefer to park the money in a fixed income mutual fund scheme and then slowly invest their money in equities to take advantage of rupee cost averaging. One of the popular uses of an STP is to transfer funds from debt schemes to equity schemes in this manner.

Conclusion
Overall, Systematic Transfer Plans (STP) can be a useful tool for investors who want to transfer funds from one scheme to another, but don’t want to transfer all the funds at once. Managing investments with STP can be easier as it does not require manual transfers. It is important to remember that STPs can only be used when transferring funds between schemes offered by the same AMC or mutual fund house.

Disclaimers:

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates, shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as a research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully.