Dear Readers,
We all are aware of Systematic Investment Plan (SIP), but well there are other ‘Systematic’ option offered by Mutual Funds such as Systematic Withdrawal Plans (SWP) and Systematic Transfer Plans (STP).
As we have discussed about Systematic Withdrawal Plan in one of our previous articles (get the post), let us see how Systematic Transfer Plan works.
What is Systematic Transfer Plan?
Systematic Transfer Plan is a plan that allows investors to give consent to a Mutual Fund House to periodically transfer a certain amount / switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house.
In this way, an investor can choose to transfer, at regular intervals, an amount/number of units from one Mutual Fund Scheme to another Mutual Fund Scheme of the same Mutual Fund House of their choice. This facility thus helps in deploying funds at regular intervals.
How does an STP work?
Here, first of all, the Investor needs to understand why they need to opt for STP. Generally, STP is preferred when an investor wishes to transfer from one fund category to another fund category such as Equity to Debt Fund, or otherwise.
One of the reasons why people opt for STP is rebalancing their Portfolio at regular intervals.
To implement STP, firstly the investor needs to select the Fund from which the transfer should take place and also the fund in which they wish to transfer. Then they need to inform their advisor or the mutual fund house that they wish to opt for STP in order to implement this scheme.
What are the Benefits of adopting STP?
Let us look at two major benefits of investing through STP:
- Disciplined use of Lump sum Fund:
Sometimes, it is wise not to invest complete fund in Equity as lump sum with markets being so volatile. Instead, a lump sum can be invested in debt fund and progressively transfer the funds in equity.
Let us see with this example:
Mr. A gets a sum of Rs. 1,20,00,000. Instead of keeping it in bank account, he decides to invest the same in a debt fund and transfer the same to equity fund on monthly basis so as to avoid timing the markets.
| Application of STP from Debt Fund to Equity Funds | ||||
| Year | Debt Fund | Equity Fund | Interest on Debt Fund | Interest on Equity Fund |
| 1 | 12,000,000 | – | 80,000 | – |
| 2 | 11,000,000 | 1,000,000 | 73,333 | 10,417 |
| 3 | 10,000,000 | 2,000,000 | 66,667 | 20,833 |
| 4 | 9,000,000 | 3,000,000 | 60,000 | 31,250 |
| 5 | 8,000,000 | 4,000,000 | 53,333 | 41,667 |
| 6 | 7,000,000 | 5,000,000 | 46,667 | 52,083 |
| 7 | 6,000,000 | 6,000,000 | 40,000 | 62,500 |
| 8 | 5,000,000 | 7,000,000 | 33,333 | 72,917 |
| 9 | 4,000,000 | 8,000,000 | 26,667 | 83,333 |
| 10 | 3,000,000 | 9,000,000 | 20,000 | 93,750 |
| 11 | 2,000,000 | 10,000,000 | 13,333 | 104,167 |
| 12 | 1,000,000 | 11,000,000 | 6,667 | 114,583 |
Analysis of the table: The rate of interest on Debt Fund is 8% whereas the interest rate with Equity fund is 12%. The amount of Rs. 10,00,000 is transferred on monthly basis to an equity SIP, whereas he keeps earning an interest on balance fund from the Debt scheme and also interest from Equity scheme on fresh installments.
- Rebalancing the Portfolio with Time:
It is important to protect the capital and that is where STP comes in! In case of medium to long-term goals such as child’s education or marriage and retirement planning, one needs to change the allocation from an aggressive fund i.e. Equity Class to a more conservative and Safe Asset class i.e. Debt Class as the time of target goal nears. Investors can do this by opting for STP from equity funds to debt funds.
Example:
A certain Mr. A aged 50 years, has an investment of Rs. 2 Crore in Equity Funds. As he is ageing, he wishes to safeguard his Asset and convert his Corpus to Debt Fund gradually over a period of years. Thus, we can have a look at a table of how Rs. 2 Crore can be systematically arranged with the help of STP.
| Mr. A’s Age | Equity Fund Value (Rs. In Crores) | Debt Fund Value (Rs. In Crores) | Total (Rs. In Crore) | Equity Allocation | Debt Allocation |
| 50 | 2.00 | 0.00 | 2 | 100 | 0 |
| 52 | 1.77 | 0.8 | 2.56 | 69 | 31 |
| 54 | 1.49 | 1.72 | 3.21 | 46 | 54 |
| 56 | 1.12 | 2.81 | 3.93 | 28 | 72 |
| 58 | 0.64 | 4.07 | 4.71 | 14 | 86 |
| 60 | 0.00 | 5.54 | 5.54 | 0 | 100 |
Source: CafeMutual.com
Note: The rate of return here are assumed to be 15% for Equity and 8% for Debt.
Thus, the above illustrations show how STP can be one of the most useful tool when it comes maintaining a balance in your portfolio.
To know more on how STP works and how can it be beneficial for you, feel free to contact us.