Today, mutual funds (MFs) have become one of the most popular investment options for accumulating wealth to fulfil long-term financial goals. Monthly systematic investment plans (SIPs) are one of the most preferred investment routes for regular income earners. However, investors opt for a Systematic Transfer Plan (STP) when there is a lump-sum to invest. Like an SIP, an STP helps spread out investments over a defined period to average the purchase cost and lessen the risk of getting into the market at its peak. In an STP, you invest a lump-sum in one scheme (usually a debt scheme) and transfer a fixed amount from this scheme regularly to another scheme (usually an equity scheme). Here is a lowdown on STP.
Portfolio Podcast | STP: A Smart Path to Investing in Mutual Funds
How it works
The fundamental concept of an STP is that you invest a lump-sum in an MF scheme (source scheme) and from this periodically, say every month, a pre-defined amount is transferred to another scheme (target scheme) of the same fund house. This is where it gets different from SIP as the amount is withdrawn periodically from a particular scheme (and not from a bank account) and is invested immediately into another scheme.
Simply put, your lump-sum in a debt scheme doesn’t remain idle while the investments are done periodically into another equity scheme in a staggered manner. Frequencies are daily, weekly, fortnightly, monthly and quarterly. A minimum of six transfers is mandatory, if you opt for STPs.
The source scheme should have a minimum corpus of ₹12,000. Typically, debt funds such as overnight funds, liquid funds or short-duration funds are chosen as source schemes as they do not get exposed to volatility and then transfers are gradually made to equity funds (target schemes).
Investors need to note that as the process of STP involves redemption of various units for transferring funds to another scheme, they might be subjected to capital gains tax and exit load. For STP facility, investors can fill up the required form with their respective fund houses and submit them physically at the branch office or online on the website.
Other options available
In addition to the plain-vanilla STP, there are other variants offered where the amount to be transferred is not fixed, and is decided based on multiple factors.
Fund houses such as Axis, HDFC and Whiteoak offer flex STPs, wherein the amount is decided through a predetermined formula based on investment value. Here, the concept of ‘buy low sell high’ is applied. Kotak and ABSL offer Smart STP and Turbo STP respectively, wherein both use fundamental and technical parameters such as valuation multiples and volatility indicators to come up with a multiplier. This multiplier is then applied to a fixed, pre-determined amount, resulting in varied amounts transferred based on market conditions. However, investors should note that the concept applied here is not in sync with the purpose of plain-vanilla STP — rupee-cost averaging.
Fund houses such as ICICI Pru, Tata, Motilal Oswal and DSP offer capital appreciation STPs. Here, only the profits are withdrawn and transferred periodically. Fund houses such as SBI allow investors to transfer dividends using their dividend transfer plan.
Tax treatment
Every transfer is considered as redemption. Hence, transfers are generally taxable. While setting up an STP, in order to avoid volatility and market timing risk, people generally tend to invest their lump-sum in debt funds, and then transfer the same periodically to equity funds. However, with the recent change in tax structure for debt funds, the complexities have increased.
Previously, for funds with less than 65 per cent of equity exposure (mainly debt funds and some hybrid funds), the short-term capital gains (STCG) for holding period less than 36 months were taxed at the investor’s respective tax slab rates. Long-term capital gains (LTCG) were taxed 20 per cent with indexation benefits. The indexation benefit made the debt funds attractive, which, in turn, made the STP route attractive.
However, as per the recent Finance Bill, the funds with less than 35 per cent equity exposure will no longer enjoy indexation benefits and the gains will be taxed at investor’s slab rates regardless of the holding period. This change in tax structure needs to be accounted for when using certain debt funds as source scheme for the STP facility.
However, if investors want to invest through the STP route, they can look at arbitrage funds as source fund. These funds deliver similar returns like liquid funds, but are taxed like an equity fund.