All about Systematic Transfer Plan (STP)

Mutual Funds | admin | May 2, 2011 at 8:21 am

It's the appraisal season once again, bringing along with it either jubilation or disappointment for employees across the globe. Salary hikes apart, this is the time when organisations dole out annual bonuses to their employees. If you have been — or are likely to be — one of the beneficiaries of this lump-sum bonanza this year, you need to start planning on how to wisely invest it rather than blow it away.

Financial planners advise to invest your money in diversified equity funds through systematic investment plans (SIPs) SIPs with a long term horizon in mind. However, if you are not yet convinced about investing in equities now die to the volatility in the market, you have one more alternative at your disposal – a systematic transfer plan (STP). This tool, too, like SIP, owes allegiance to the rupee-cost averaging principle, which is touted as an antidote to uncertain market conditions.

With a SIP you direct a pre-decided sum regularly, say monthly or daily, to a fund of your choice. But, in the case of an STP, you invest the lumpsum amount in the scheme, with an arrangement that it will be redirected to another fund picked by you. You can opt for daily, weekly, monthly or even quarterly transfer plans. If you are not comfortable with the choppy conditions in the market, you can park the lump sum in, say, a liquid fund, and transfer a specified amount into an equity fund at regular intervals.

Thus, it eliminates the anxiety surrounding timing the market by helping you take one step at a time. This is a better option than parking your money in a savings bank account (from which a SIP is usually facilitated), as the fixed-income fund could yield higher returns. Though it seems like a foolproof solution, you need to be aware of the flipside as well. For one, if you wish to transfer your lump sum into a fund house's equity scheme in a piecemeal fashion, you will have to park the amount in the same entity's debt fund, even if it has not been the best performer in its category. Also, when the market trajectory is clearly northward-bound, STP may not be advisable.

Here, you may be better of investing at one go, as the units are likely to get progressively costlier. Tax impact could be another irritant — when you redeem your units in the debt fund to transfer them to an equity scheme, you will be liable to pay a short-term capital gains tax. You can opt for the daily, weekly or monthly dividend option under liquid fund to minimise tax implication.

Source: Economic Times