Everything you need to know about Systematic Transfer Plans
Do you plan to take advantage of the market correction by increasing your equity exposure? If you are a mutual fund investor, one way to do this is to initiate a Systematic Transfer Plan (STP) from a debt fund to an equity fund.
STPs allow you to periodically transfer money to a selected plan (target plan) from another plan (source plan) in the same fund house.
This way, you don’t have to worry about market timing, as your investments in the stock fund will be spread out over a period of time.
STPs are useful when you have a lump sum but don’t want to invest all the money in stocks at once. You can consider investing it in a liquid fund and initiate an STP to an equity fund. You will also benefit from Rupee cost averaging, which helps to buy more units when the market is low and fewer units when the market is high.
Also, for example, if you want to withdraw money from an equity fund within a year, you can opt for the STP from an equity fund to a debt fund.
Types of PTS
STPs generally come in two forms: fixed STP and variable STP. In a fixed STP, a fixed amount or number of units will be transferred from the source schema to the target schema at predefined intervals. In the case of a variable STP or a Flexi STP, the amount increases or decreases depending on market conditions.
For example, under ICICI Pru MF’s STP Booster, the payout amount can vary from 0.1 times to 5 times the base payout amount depending on the equity valuation index, which is a model business owner. If you are already enrolled in the ICICI Mutual Fund Booster STP, note that the fund house recently changed the payout multiples effective February 28.
Some fund companies such as HDFC Mutual Fund and Kotak Mutual Fund also offer a capital appreciation STP, in which the profit made on the investment in the source fund will be transferred to the target system.
These STP forms can be filed online, at the mutual insurance agency or at approved collection centres. Note that not all third party aggregators such as Paytm Money can provide STP options in its app.
Points to note
Each STP transfer is considered a redemption from the source fund and a reinvestment in the target fund. The redemption of mutual fund units from a source fund attracts capital gains tax into the hands of an investor. Withdrawing from a debt plan before three years will be considered a short-term capital gain and will be taxed at the rate of your income tax slab. Long-term capital gains on debt funds are taxed at a flat rate of 20% after indexation. In the case of equity funds, short-term capital gains realized on the redemption of units before one year are taxed at a flat rate of 15%, and long-term capital gains exceeding ₹1 lakh per year attracts tax at 10%.
As a general rule, exit charges also apply to withdrawals within one year of the investment.
The other key point to note with an STP is its duration, according to Vishal Dhawan, Founder and CEO, Plan Ahead Wealth Advisors. “If the target fund is a hybrid fund or a large cap fund, investors can opt for the STP for a shorter period (around six months); but if funds are shifted to mid or small cap, they may choose to stretch out for a long period (around 12 months) due to the higher volatility in that space,” he added.
When markets correct, investors may be eager to increase their equity. “One must keep in mind the strategic asset allocation between equities and debt before embarking on the STP,” according to Dhawan.
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