Investment in Mutual Funds is gaining popularity day by day. MF investments offer higher return compared to other investment options in a long run. Though returns in MF are subject to market risks.
So far we have heard about Systematic Investment Plan (SIP), which has emerged as a most popular mode of investing a small amount in MF schemes. It has got its own advantages. If somebody has received a lump sum amount from the sale of properties or redemption proceeds of earlier investment is hesitant to invest in MF schemes. As he will not be getting the benefit of averaging the cost of investment which he gets in SIP. Investing a lump sum amount at a particular level of the market may prove to be a risk and may not yield desired returns. So here is an opportunity for such investor to stagger their amount and invest the same over a period of time. This is called Systematic Transfer Plan.
SIP VS STP:
The aim of both is same i.e. enabling investment. But they have different features.
|ENABLES SMALL AMOUNT TO INVEST AT PERIODICAL INTERVALS||ENABLES TRANSFER OF AMOUNT IN INSTALMENTS FROM LUMPSUM AMOUNT PERIODICALLY|
|AMOUNT IS TRANSFERRED FROM BANK A/C||AMOUNT IS TRANSFERRD FROM LUMP SUM AMOUNT ALREADY KEPT IN MF SCHEME TO OTHER SCHEME|
|CAN BE CONTINUED FOR A LONG TIME||AMOUNT TO BE TRANSFRRED WITHIN SHORT PERIOD SAY 12 MONTHS.|
|NO TRANSFER CHARGE||TRANSFER CHARGE APPLICABLE|
You can choose either SIP or STP depending upon your requirement. Both are the most convenient way of investment in MF schemes.
HOW STP WORKS:
The working of STP can be understood with the following example.
Suppose you have received a lump sum amount of Rs 10 lacs from your earlier investment or sale of some property and you want to invest the same in a right kind of MF scheme. For this first, you have to place the entire Rs 10 lacs in a Debt fund or Liquid fund of an MF fund offering STP facility. Then you have to select the fund CALLED Target Fund in which you want to invest and amount of STP and periodicity. Please note that the period of STP should not be too long, the ideal period is 10-20 months.
BENEFITS OF STP:
- The lump sum amount kept in a liquid fund or debt fund fetches a better return than savings bank account.
- It protects from the fluctuation or volatility of the stock market.
- It helps in averaging the purchasing rupee cost of investment. In the falling market, more units can be purchased.
- It helps in rebalancing the portfolio i.e. between Debt and Equity.
TYPES OF STP:
In this type amount to be transferred is predetermined and fixed. Once the amount is fixed it can not be changed.
In this only Capital Appreciation gets transferred to the target fund. Capital part of investments remains intact.
This type of STP has the facility of transferring variable amount to Target fund. In the falling market, you may transfer more amount to target fund to get the benefit of lower NAV and getting more units. In the bullish market you may slow down the transfer by reducing the amount of STP.
The period of STP over which fund is to be invested in target fund depends upon current market position, current funds allocation in equities and risk profile of an investor. However, too long period will adversely affect the advantages of STP.
Entry load and Exit Load:
There is no entry load for investment in a lump sum in any fund, but it attracts exit load which varies from fund to fund depending upon the period of investment subject to a maximum 2%.
MF returns are subject to present tax provisions, whether invested through SIP or STP. STP is a mode of investment and does not enjoy tax exemption.
In case of a Debt fund, if the investment is held for more than 36 months, it will get the benefit of Long Term Capital Gain(LTCG).LTCG is levied @20% after adjusting with indexation cost of Principal investment. This benefit reduces the tax liability considerably.
In case of an Equity fund, if the investment is held for more than 12 months, it will be considered as long-term and will get the benefit of LTCG. Currently, LTCG is Nil up to Rs 1.00 lac. And Beyond Rs 1.00 lac it is taxed @15%.
To consider an MF as an Equity fund, minimum investment in equity or equity-related instruments should be 65% or more of total investment.
KEY POINTS TO REMEMBER:
1.STP enables to transfer amount from one fund to another fund in a systematic manner.
2.STP helps in taking the advantage of rupee cost averaging.
- Normally minimum 6 transfers are required to get the advantage of STP. The fund can be transferred Daily, monthly and quarterly intervals.
- Generally, the fund is transferred from Debt fund to Equity fund. Some MF offer transfer vice versa also.
- It offers LTCG tax benefits if an investment is held for more than 36 months for Debt fund and 12 months for an Equity fund.