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STP is the transfer of money from one mutual fund plan to the other. This transfer happens periodically, thereby allowing the investors to gain market advantage by moving to securities at a time when they offer high returns. It is a good strategy to stagger your investment for a certain period of time to minimize risks and balance returns.
Table of Contents
An STP is primarily of three types:
As per this type of STP, the amount of transfer is determined by the investors according to the need. An investor wants the amount depending on the market rate fluctuations.
In this case, the amount and frequency of the amount to be transferred are fixed. Investors decide the amount according to their financial goals.
In this form of STP, the capital appreciated is transferred from a fund to another prospective scheme, and the capital remains safe.
The investors are required to select a fund from where the transfer takes place and the fund to which the transfer is made. Such a transfer can be made daily, weekly, monthly, or quarterly, depending upon the chosen STP.
In case where an investor decides to transfer from liquid fund to an equity fund, the lump sum is invested in liquid or floating short term plan. It is transferred at regular intervals at a specified equity fund.
An STP has the following features:
SEBI (Securities and Exchange Board of India) has mandated no minimum amount of investment to be invested in the source fund. However, it may be noted that some Asset Management Companies ask for a minimum investment of 12000 rupees to be eligible for this scheme.
In order to apply for an STP, a minimum of six transfer of funds from one mutual fund to another is mandatory for investors. There is no entry load, but SEBI has allowed fund houses to charge exit loads on each transfer. The exit load cannot exceed 2%.
STP allows a disciplined and planned transfer of funds among two mutual funds scheme. Most often, investors begin an STP from a debt fund to an equity fund.
Each transfer from one fund to another is known as redemption and new investment. The redemption is taxable. In case of equity funds, transfer in one year of purchase shall be taxed under the Short Term Capital Gains Tax. In the case of debt funds, money transferred within three years is subject to Short Term Capital Gains Tax.
An investor can enjoy the following benefits through STP:
STP helps you to earn higher returns on your investments. By shifting to a more profitable venture amidst wild market swings, helps in gaining market advantage, thereby maximizing profits.
The returns from STP are reliable as the amount in source fund derives interest until the entire amount is transferred. Further, in the case of volatility in the stock market, investors can transfer their funds. This helps in the safekeeping of the financial resources of investors while getting steady returns.
Rupee Cost Averaging is implemented while investing in Mutual Funds through STP. It allows investors to lower their average costs incurred on investments. It follows the case where investment in fund is made when their average price is low and selling them when the market value increases.
STP helps in rebalancing the portfolio by moving investments from debt to equity funds or vice versa. In case your investment in debt rises, money can be reallocated to equity funds through an STP, whereas where your investment in equity goes up, money can be moved from an equity fund to a debt fund.
An STP can be used to shift from a high-risk asset class to a low-risk asset class.
An STP is suitable for those investors who have a lump sum amount to invest. The investors can put the lump sum amount in a liquid fund earning returns. Moreover, opt for STP and systematically transfer a fixed amount regularly in an equity mutual fund. When the money is transferred to an equity fund, fixed returns can be obtained from the debt funds and returns from the equity scheme.
The following points can be considered:
Read our article:Strategic Financial Resources Management
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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