Because of the high stakes involved, investors are increasingly hesitant to commit large sums all at once. This is why risk management specialists advocate for a systematic transfer plan. Accordingly, we have addressed the following in this article:

STP in Mutual Fund

What is stp in mutual fund? Systematic Investment Plans are well-known amongst investors (SIPs). Okay, but what about STPs, or what is systematic transfer plan? Although many investors are familiar with SIP, the phrase “Systematic Transfer Plan” may be unfamiliar. Unlike systematic investment plans (SIPs), which involve moving money from a savings account into a mutual fund, systematic transfer plans (STPs) include moving cash inside a mutual fund rather than between plans. Therefore, a sensible way to spread your investment’s risk and reward across time and a fixed period are to use systematic withdrawal plans or STP.

Also Read: How to invest in Exchange Traded Funds?

If you invest’ systematically’ in stocks, you may profit regardless of market conditions. Here, an AMC lets you put all your money into one fund and then automatically reinvest some of it into another plan regularly. The former account is known as the source scheme or transferor scheme, while the latter is known as the target scheme or destination scheme.

How Does Systematic Transfer Plan work?

Let’s say you have accumulated INR 10 Lakh through the sale of assets and are interested in investing it in an equity fund via STP over 20 months. The first step in investing in an equity fund is finding a debt fund that supports STP. Choose an equity mutual fund next. Invest ₹ 10 lakh in the debt fund and then determine the amount which will be moved from the debt fund to the equity fund and the frequency. (Here, 50,000 must be deposited throughout 20 monthly payments).

Types of STP

Fixed STP

Here, the quantity and frequency of transmission are fixed. When applying for this investment, investors may choose their target return on investment (or ‘Tier 1’ return).

The gain in Value of Capital

In this STP, only the capital appreciation is moved from the source fund to the target fund; the original investment is never at risk.

Flexi STP

“Flexi STP” refers to the system’s adaptability. You can move money from the donor fund to the recipient fund. If the fund’s NAV drops, you may invest more money.

Benefits of STP

Minimal Outlay

Investing as little as one dollar in the source fund is possible. However, the minimum investment required to participate in the systematic transfer schemes of certain AMCs is Rs.12,000.

Incoming and outgoing traffic

To apply for an STP, you need to conduct at least six capital transfers from one mutual fund to another. Fund houses may charge an exit, but SEBI doesn’t prohibit it. However, the exit load must not go over 2%.

Methodical and fruitful

A systematic Movement Plan (STP) provides a controlled and scheduled money transfer between two mutual fund schemes. Typically, STPs are initiated by investors moving money from debt to equity.

STPs and Taxes

While STPs may be beneficial, investors should be mindful of the applicable tax and exit charges. Any redemption and subsequent investment in a fund are treated as a transfer between funds. In most cases, the rescue will trigger taxation. In addition, short-term capital gains tax is applied to distributions from a debt fund during the first three years (STCG). However, even after accounting for taxes, the returns would still outperform what might be obtained.

Who should invest in a Systematic Transfer Plan (STP)

If you want to invest a large quantity of money but you aren’t quite ready to do it all at once, stp mutual fund is a great option. This might be due to their fear of the unpredictable nature of the market. Equity investments as a whole may not be something they feel comfortable with. These financiers may put their money in either liquid or debt funds. Once these assets are invested in an equity fund, you will get the fixed returns from the debt funds and the possible returns from the equity plan.

Conclusion

Alternatively, you might choose to invest in mutual funds regularly via a mutual fund distributor. As an intermediary, you would get compensation from the mutual fund company through a commission. Mutual fund investments may also be made offline by visiting a mutual fund company, filling out an application, and providing documentation to verify your identity and ensure you are a qualified investor. Finally, when you sign up for the direct plan, you may work directly with the NUUU to purchase mutual funds.

FAQs

Can STPs benefit during market peaks?

One significant benefit of using an STP is how quickly and easily money can be moved about and used. Investors may reap the benefits of a smooth and efficient deployment of resources thanks to the automated reallocation of cash among the chosen funds.

What are the tax implications of a Mutual Fund STP?

Most STPs come from liquid funds, which are taxed at your regular rate. However, the actual tax from STPs is not excessive since the returns/gains in such funds are also approximately 6-8%. According to the FIFO accounting method, each STP is recorded as a combination of capital and revenue.

Which is better, SIP or STP?

SIPs are great for those wishing to invest consistently over the long term. For example, Stp in a mutual fund may serve a similar function. However, a sizable initial investment and subsequent monthly contributions over a predetermined period are required. Therefore, investors with a sizable quantity of money to put away might consider a systematic investment plan (SIP).