Systematic Transfer Plans – Get More From Mutual Funds

Most of the Indian investors have come to terms with the fact that SIPs (Systematic Investment Plans) of mutual funds are the best form of investment, especially in times like these when volatility rules share market. In such a scenario, losses can surely be minimized by SIPs.

But how about an option where you gains from SIPs or regular mutual funds’ investments can be transferred into a more secure account so that it can remain free from market volatility. This is where Systematic Transfer Plans (STPs) come in.

As the name suggests, Systematic Transfer Plans, a feature in mutual funds, enable you to transfer money from debt to equity or equity to debt fund, systematically, as per your choice and market conditions. Let’s understand more STP feature with an example. Let’s assume, you have lump sum investible surplus of Rs 1 lakh but do not want to invest the entire money in mutual funds, in a go due to higher prices of shares. Instead, you want to invest regularly through SIPS. What do you do with the money for interim period? Putting it in savings bank account would earn you much lesser interest and returns would be inappropriate. Here, with STP feature, you can invest your lump sum money in liquid mutual funds and transfer it, on regular basis,  in the SIP of your choice.

Some Calculations

Investible Surplus = Rs 1 lakh

Intention: Buy SIP of Rs 1,000.

To invest this money, one buys liquid mutual fund units worth the total amount, i.e. Rs 1 lakh, at the rate of Rs 10 each.

Month 1:

Investment in Liquid Fund = Rs 1 lakh

Units of liquid fund A = 10,000

Present NAV of liquid fund A = Rs 13

Amount to be transferred in Fund B = Rs 1000

Therefore,

Units cancelled from fund A = 1,000/13= 77 which is equivalent to Rs 1000.

Remaining units of liquid fund A = 10,000-77= 9923

Present NAV of equity fund B = Rs 15

Units bought in fund B= 1000/15 = 67     

This is how, the STP will continue to work in every month – cancelling the units of first fund and transferring it into second fund of your choice.

There are two types of STPs, available in market:

1. Fixed amount transfer, as shown in the example above, enable you to transfer a fixed amount to the desired fund, at frequency decided by you.

2. Capital appreciation transfer, on the other hand, is reverse phenomenon. In this, principal amount invested by you remains intact in the original fund selected and capital appreciation, if any, is transferred to the transferee fund (second fund selected by you). Here, you can decide the maximum cap of the funds, to be transferred.

Availability

The availability of STP feature depends upon the discretion of mutual fund houses. Some fund houses let you transfer your fund from some specified funds into other funds with in the same company; whereas others let you invest in the funds of other companies. While selecting STP feature, you can opt for weekly, monthly or quarterly options. Once an option is picked, transfer of funds takes place on specified dates, and NAV of that date would be applicable. Here, you can choose the date of your choice, from available dates, to make it further convenient for you.

Some mutual fund houses also have a minimum amount threshold that has to be there to start STP. For example, one can only select STP option in funds of Franklin Templeton Investments if the minimum account balance in fund is at least Rs 12,000. Mutual fund houses with minimum transferrable amount are as follows:

Advantages

1. When you feel that your portfolio needs rebalancing and too much money is going into debt schemes/ funds, STP comes in handy and saves you from lots of operational hassles that would otherwise go in transferring funds into equity schemes.

2. When market conditions are in favour of equity growth in near future, it’s good to skew your portfolio towards equity for better returns with the help of STP.

3. When important goals are near, it is important to protect your capital transfer from equity to debt funds.