Systematic investment plan (SIPs) are popular and an easy way for new retail investors with limited liquidity to invest systematically from their savings accounts into mutual funds.
Systematic Transfer Plans (STPs), on the other hand, allow one to periodically transfer a certain amount of units from one mutual fund scheme to another scheme on a pre-specified date, as a committed sum can be systematically transferred from debt to equity funds and may help investors to achieve desired rupee cost averaging.
“The fundamental premise of both SIP and STP is to benefit from rupee cost averaging and as a result investing in any systematic plan is agnostic of the market conditions. SIP is more suited to new retail investors with limited monthly liquidity, while STPs may be more suitable for mature mutual fund investors,” said Yogesh Kalwani – Head, Investments – InCred Wealth.
STP is an option available to investors who have a surplus/lump sum but they don’t want to keep the money idle and also want to take advantage of rupee cost averaging. In case of STPs, investors typically park their money in a liquid/debt mutual fund and then do a systematic transfer from there.
On how to effectively use STPs, Deepak Jain, Head-Sales, Edelweiss MF suggested that one can do this on a fixed interval or some pre-decided triggers, for example a certain % of market fall. “For salaried people with fixed flows, a simple SIP can work, but for people who don’t get regular incomes or cashflows, STPs are useful,” Jain added.
“Simple rule of thumb is when markets are turning bearish and if you have investment in debt funds, then you can think about systematically transfer to Equity funds to buy more units. The time horizon of transfer plan needs to be decided keeping investor’s goals and risk appetite in mind. When markets are turning bullish, we can book some profits and protect capital by systematically shifting funds from Equity mutual funds to Respective debt mutual funds,” said Tarun Birani, Founder & CEO of TBNG Capital Advisors.
STP is nothing but selling from one mutual fund and buying to another mutual fund. Whenever a sale happens, there will be taxation implications. In the case of STPs in order to shift funds one has to redeem the funds from existing debt/liquid funds which can attract capital gains tax.
“If you are parking your investment in Liquid funds or other debt funds and start STP, then each STP will incur STCG Taxation on Debt funds. And vice versa is also true. But considering the growth of Liquid Funds and systematically investing in Equity funds, the taxation implication will be trivial,” said Birani.