Have a Big Lump Sum amount- Use Systematic Transfer Plan (STP)

You are well familiar with a way of investing in Mutual Funds monthly through Systematic Investment Plan (SIP) where a fixed amount of money goes from your Bank Account to any Mutual fund schemes. However, SIP is meant for those who have regular stream of inflows, especially salaried individuals, they used to earn every month and put a small amount in mutual fund scheme so as to make volatility work in their favour. But what if, you have available a big lump sum money in your hand and want to get same benefit of cost averaging and eliminate a risk of volatility through investing in mutual fund schemes just like an SIP. In that case, STP makes sense as first you do invest a big lump sum of money into a debt or liquid fund of your choice and make a set up of fixed amount of money to move from a debt fund into your equity fund, at periodic interval. In this way, you can not only get better return from saving rate, even close to bank FD’s rate in your debt fund but also get benefit of cost averaging of equity mutual funds units during volatility of stock market.  But before plunge into STP, you should be aware of all pro and cons of plan as it seems to look easier as done.

Systematic Transfer Plan (STP)

Like a SIP, all fund houses also offer a systematic transfer plan (STP) facility which allows you to do a regular transfer from a lump sum invested amount in debt fund or liquid fund to buy the units of another equity scheme at the applicable net asset value (NAV) within the fund house. But an STP is not worked the same as a systematic investment plan (SIP) as your money moving from your savings account to your equity scheme. It works through your money moving from a debt fund to your equity scheme and vice-versa. Whenever, you have available a large amount of money at any time, you should invest your money in an ultra short-term debt fund or a short-term bond fund which could mix and match with your financial goals. And then make a setup of transfer the fixed amount of money to an equity fund of your choice within the fund house, at either monthly or quarterly basis. The process of periodic transfer of money would be running until your debt investment goes exhausted. However, it’s best to finish your transfers within about six months. Therefore, it should be set up in such a way that it could be equated in six instalments of your large chunk of investment in your debt fund. It may be possible that after all your periodic transfers are exhausted, there may be some money left in your debt or liquid fund  due to your debt or liquid fund corpus grows aligned with money market.  That residue money does not automatically transfer to equity fund as it remains invested into your debt or liquid fund. In that case, you can either transfer it yourself or put in more money in a fund later and start a fresh STP.

Rebalance your Portfolio

STP is not meant for only periodically transfer from debt to equity fund but also used as a tool to rebalance your asset allocation, when your equity part goes up, you can even reduce your equity exposure to start STP from equity to debt for 6 months or 1 year to maintain the optimum or advised as asset allocation. That’s why; there are two types of STP plans, Fixed and Capital Appreciation. In Fixed Plan means a fixed sum will be transferred to the target mutual funds, on the other hand in Capital Appreciation, only the amount of capital which is appreciated gets transferred, that was the original lump sum amount invested in the start is protected. Even you would be investing in some equity schemes for your long-term financial goals such as child education, buying a home or retirement; you should start, to make set up for STP from equity to debt fund when your goal is approaching nearby, say 2-3 year for preservation of your accumulated equity returns.

Also Read: Re balancing – a passive way of the Timing Market 

Tax implication on STP

STP where you are moving money from a debt fund to an equity fund, it is considered as redemption in one fund and purchase in another fund. It will be treated as short- term capital gain and taxed as per your income slab, if the debt investment is actually being moved in less than three years, otherwise it will be treated as long-term capital gain and taxed at 20% on your capital gain with an indexation benefit. On the flip side, if you are using STP from equity to debt fund, it is also treated in as short-term capital gain in less than one year and taxed at 15% on your capital gain but it after a period of one year then the long-term capital gains is nil but subject to pay securities transaction tax @ 0.25% will be deducted on equity schemes at the time transferring money to debt fund.

Alternatively, you can invest in arbitrage funds, which are treated as equity funds for taxation, and do STP from there. Though arbitrage funds are treated as equity funds, they are less risky as they invest in stocks and their futures simultaneously to hedge the portfolio. If you do an STP before 12 months, it will attract a lower short term capital gains tax of 15%. However, arbitrage funds have own their limitations in respect of exit load costs as debt or liquid funds are enjoyed as no exit load cost at any point of redemption or switching units to equity funds.

Conclusion

Like SIP, an STP from debt to equity will work when markets are volatile and in bear phase, then this situation will be better than the onetime investment option. But on contrary scenario where equity markets are in an up move, in that case, one time investment may be a good choice but an STP may lose its shine. However, it is very difficult to time the market. It should be remembered that STP is a just convenience of your systematic investing into equity or debt funds, in case of lump –sum or surplus available, not to be used as a tool for trading your investment and put into the risk your funds for getting higher returns.

Also Read: Flexi Systematic Transfer Plan that catches falling market.

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