Systematic Transfer Plans: Many of us believe that regular investors have little know-how about the complexities of the stock markets. They find number crunching a little intimidating, hence, they rely on mutual funds for investments.
However, the returns given by equity mutual funds are dependent on the stock market. Some of us do not like to see that our fund is down 8% to 10%, because of changes in the market.
At the same time, we do not like keeping our money locked in savings bank accounts and fixed deposits that pay anywhere between 3% to 7% in interest.
In this article, we shall take a look at how investors can get good returns and minimize risks with the help of Systematic Transfer Plans.
What Are Systematic Transfer Plans?
Systematic Transfer Plans (STPs) are a great way to take advantage of market corrections by increasing one’s exposure to equity.
STPs allows an investor to transfer money from one mutual fund scheme to another, without having to worry about timing the market. These transfers happen from one fund to another in the same asset management company.
They come in handy when an investor has a lump sum amount to be invested in equity but does not want to do so at once. They stagger investments to an equity fund over a period of time and balance returns.
For example, an investor invests ₹1,00,000 in a debt fund and transfers ₹10,000 per month to an equity fund. In this case, funds get transferred from the debt fund instead of the investor’s bank account.
The debt fund is called the ‘source scheme’ and the equity fund is called the ‘target scheme’. Sometimes investors transfer funds from equity schemes to debt schemes.
Who Should Invest In Systematic Transfer Plans?
Systematic Transfer Plans are ideal for those investors who:
- Have limited resources but want to generate high returns by investing in the stock market.
- Want to reinvest their money in safer securities like debt instruments.
Systematic Transfer Plan (STP) Vs. Systematic Investment Plan (SIP)
Let’s take an example to understand the difference between SIPs and STPs. Suppose there are two people, Mr. A and Mr. B.
- Mr. A invests ₹ 10 lakh in an equity fund through the SIP route. He has this money parked in his savings bank account that earns an interest rate of 4% per annum. ₹ 2 lakhs is transferred per year to an equity fund for 5 years. The expected return at the end of 5 years is ₹ 5.8 lakhs.
- Mr. B invests ₹10 in an equity fund through the STP route. He has this money parked in a debt fund that earns 6.5% per annum. ₹ 2 lakhs is transferred per year to an equity fund for 5 years. The expected return at the end of 5 years is ₹ 6.4 lakhs.
In this case, Mr. B is smarter as he does not keep his money idle in a savings bank account that earns him lesser returns.
Types of Systematic Transfer Plans
- Fixed Systematic Transfer Plans: The transfer of funds from the source fund to the target fund happens at fixed intervals. The investor may choose to transfer a fixed amount daily, weekly, or monthly.
- Flexible Systematic Transfer Plans: Investors transfer funds as and when the need arises. This depends on market volatility and the performance of a scheme.
- Capital Systematic Transfer Plans: They transfer the total gains made from capital appreciation from one fund to another fund. The latter usually has a high potential for growth.
Advantages of Systematic Transfer Plans
- Earn more than savings bank accounts: Systematic Transfer Plans (STPs) help investors to earn more than saving bank accounts. The source fund is usually a liquid/ultra short-term fund that gives 7% to 9% returns.
- Extra returns: Investors earn from the source fund as well as the target fund. The money in the target fund is invested in an equity, balanced, sectoral, or thematic fund. These funds are risky, but they generate higher returns.
- Balance: Investors can transfer their money to debt funds when the markets are high. This protects their investment from a fall and helps them to get more returns. When the markets are low, they may transfer money to equity funds. This helps them to get more units at lower prices.
- Minimum investment: Fund managers recommend that investors should invest ₹12,000 in Systematic Transfer Plans. However, investors may invest as low as ₹5,000.
- Averaging the cost: Fund managers buy a few units at a higher cost and a few at a lower cost. Therefore, systematic transfer plans help to average out the cost.
- Managing Risks: Systematic transfer plans help those who are about to retire. STPs from equity funds to debt funds help to prevent loss of value as an investor approaches retirement. They keep the funds safe in debt funds and continue to earn returns in equity funds.
Things To Remember While Investing In Systematic Transfer Plans
- Systematic Transfer Plans help in reducing risks, but they do not eradicate them. The markets may impact the returns that STPs give.
- STPs are better for the long term. They may not give massive returns in the short term.
- Keep an eye on the underlying assets and their phases. Do not transfer capital when the market is at its peak.
- Investors should have considerable knowledge about market trends and patterns to make good returns from systematic transfer plans.
- Investors should keep tax deductions in mind before investing in STPs.
- Do not opt-out of an STP because of market fluctuations, as this will defeat the purpose.
- If you require an amount in the immediate future, do not invest it in an STP.
- A minimum of six transfers of funds is mandatory to apply for this scheme. Charges are involved in each of these funds. Investors have to pay an exit load, though an entry load is not applicable.
- The transfer of funds from a liquid fund to an equity fund does not attract an exit load.
- Not all schemes provided by a fund house are eligible for STPs. Investors have to check for eligible schemes with a fund house or distributor and invest accordingly.
In this article, we got to know that investments in Systematic Transfer Plans (STPs) are great for those investors who want to invest in a lump sum, but not at once.
STPs help to make higher returns as compared to Systematic Investment Plans (SIPs) over a period of time. However, their returns depend on the markets.
They help investors to get additional units at low prices when the markets are in the red and vice versa.
When investors have an amount that is too little to invest in real estate and too much to keep in savings accounts, STPs come to the rescue.