A Systematic Transfer Plan (STP) facilitates investors to transfer their capital from one scheme to another. This transfer is not done in a lump sum, but this transfer takes place over a period of time which enables investors to make market profits by transferring into assets when they offer higher returns. STP also works as a shock absorber as it protects the investors during market volatility. The basic principle behind the STP is the judicious transfer of fund and its utilization. As the funds naturally get adjusted in the chosen funds, the investor can get benefit from the uninterrupted and effective allocation of available resources. STP Mutual Fund can shift the investor’s financial resources between different funds operated by only a single asset management company and cannot inter-shift between multiple schemes offered by multiple companies.
STP is a suitable instrument for investors with limited financial resources. This serves both types of investors, one who wants to switch to higher return yielding assets from safer ones and vice versa.
How many types of STPs are there?
Broadly there are three categories of STP
- Flexible STP: Under this, the total funds to be transferred are decided by the investors as and when required. The investor can transfer a larger or smaller part of his current fund, depending on the volatility of the market and the projections made about the performance of the scheme.
- Fixed STP: In the case of Fixed STP, the total amount transferred from one mutual fund to another remains fixed, as decided by the investor.
- Capital Systematic Transfer Plan: Capital STP transfers the total gain from market growth of one fund to another scheme with higher growth potential.
Why investor should choose STP?
Well, the primary reason is that it protects investors from market volatility. Besides, other benefits of STP are.
- During the bad economic phase, investors can transfer their capital into a safer investment like debt funds.
- Saves both the time and effort of the investor.
- Easier for investors to come out of poor-performing assets. STPs allows investors to gain higher returns through shifting to a more profitable venture during the market boom.
- It facilitates investing in other funds without the process of redemption.
- Each transfer under the STP is subjected to tax deductions, provided capital gains are incurred. One can save Capital gain tax, as you can transfer funds from one scheme to another without redemption.
What you should know before opting for STP?
- The STP investment scheme was designed for long term arrangement and hence windfall returns should not be expected immediately.
- In addition, if STP is chosen, the investor should have a sound knowledge of the market trends and patterns.
- One must check the exit load and tax deductions of various schemes before choosing any Systematic Transfer Plans.
Read more: Your Guide To Mutual Funds