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Move Your Money Wisely: Understanding Systematic Transfer Plans

Introduction

A test match begins on a cold and cloudy day. Looking at the weather, one team drops a spinner and includes five pacers in the eleven teams. On the second day, the clouds clear, and the pitch starts taking turns. The team is in a fix and helpless – the team cannot be changed. A similar situation can occur when investing – markets are dynamic, and volatility can cause the prices of different asset classes to fluctuate, even within short time periods.  Unlike cricket, there’s help for you, as a mutual fund investor, to counter volatility and price fluctuations. . The help comes from the Systematic Transfer Plan (STP). An STP helps investors in optimising returns while managing risks effectively.

What is a Systematic Transfer Plan (STP)?

A Systematic Transfer Plan in mutual funds is a facility offered by mutual fund houses that enables investors to automatically transfer a predetermined amount from one mutual fund scheme of a mutual fund house to another scheme of the same fund house at regular intervals, such as monthly, quarterly, or annually. It is considered to be a convenient and disciplined approach to asset allocation.

Types of Systematic Transfer Plans

Systematic Transfer Plans can be broadly categorised into three types, each serving a different investment objective:

  • Fixed STP:The investor sets a predetermined amount for regular transfers from the source scheme to the target scheme. This strategy is ideal for those with specific goals, like transferring ₹10,000 monthly from liquid to equity funds for exposure to equities.
  • Capital Appreciation STP:Only profits from the source scheme are transferred to the target scheme, keeping the initial investment intact. This is beneficial for those looking to book profits to diversify into other assets.
  • Variable STP:The transfer amount varies based on a formula or percentage of investment value. For example, 50% of monthly capital appreciation can be transferred from liquid to equity funds.

Benefits of a Systematic Transfer Plan

  • Diversification: STPs diversify portfolios by shifting funds between asset classes, reducing risk while capturing growth.
  • Rupee Cost Averaging helps investors capitalise on market fluctuations by lowering the average cost per unit.
  • Disciplined Investing: Automatic transfers reduce the emotional risk in decision-making.
  • Flexibility: Flexible transfer options, aligned with goals and risk tolerance, are available.
  • Tax Efficiency: Possibility of tax advantage, depending on fund types and holding periods.

STP Calculator in Mutual Funds: Estimating Your Returns

To help you evaluate the potential returns and plan your STP strategy effectively, many mutual fund houses provide STP mutual fund calculator tools. These calculators typically require inputs such as:

  • Investment amount
  • Transfer amount and frequency
  • Expected rate of return for the source fund (liquid/debt fund)
  • Expected rate of return for the target fund (equity fund)
  • Investment tenure

Based on these inputs, the STP return calculator can provide estimates of:

  • Total transfers from the source fund to the target fund
  • Projected value of the investment in the target fund over time
  • Potential returns on the overall investment

Conclusion

A Systematic Transfer Plan (STP) can be a powerful tool for investors seeking to capitalise on market opportunities while managing risks effectively. By gradually transferring your funds from one scheme to another, you can benefit from rupee cost averaging, diversification, and a disciplined investment approach. With the STP calculator, you can estimate your potential returns and plan your STP strategy accordingly.