What is a Systematic Transfer Plan (STP)?
An STP enables an investor to transfer money from one mutual fund scheme to another within the same AMC. Investments are not withdrawn completely at one go, but systematically transferred (or switched) between different asset classes, for example, from debt to equity.
The AMC provides various options which determine the amount and frequency of transfer of funds. Units from the source fund are sold and the proceeds are used to buy units in the target fund.
What are the types of STPs?
STPs are offered in three variants - fixed, capital appreciation and swing.
In a fixed STP, predetermined amounts are regularly transferred from the source scheme to the target scheme. Let’s assume that an investor has invested Rs 1 lakh in an equity scheme, and wants to transfer Rs 20,000 to a debt scheme every month. If the NAV for the debt scheme is Rs 100 in the 1st month, the investor will be allotted 200 units of the debt scheme. If the NAV of the debt scheme falls to Rs 50 in the next month, the investor will get 400 units. The transfer continues until all the units in the source scheme are transferred to the target fund.
In a capital appreciation STP, only capital gains (a percentage or the entire profit margin, as per the investor’s choice) are transferred to the target scheme. However, this option is only available with growth plans and not with dividend payout schemes. Assume that an investor has invested Rs 1 lakh in an equity fund with an NAV of Rs 100. This gives the investor 1,000 units. If the NAV goes up by Rs 20, and the investor wants a transfer of 50% of the capital gains, Rs 10,000 will be transferred to the target fund.
What is swing STP?
A swing STP tries to achieve the target market value which can be more or less than the lump sum invested in a debt scheme. To avail of a swing STP facility, an investor needs to invest a minimum lump sum. Swing STP works on the concept of value cost averaging. Here, the system enables the investor to buy more units when the index declines and less when the market goes up, thus booking some profits at regular intervals.
How does swing STP work?
Let’s say Mr Smart wants to invest Rs 36,000 over a period of 12 months in a particular fund called Fund Z. In order to do this with the swing STP mode, Mr Smart has to first make a lump sum investment of Rs 36,000 in any fund belonging to the same fund house, let’s say Fund A. Having done this, Mr. Smart will instruct the fund house to transfer Rs 2,000 every month from the existing Fund A to the target Fund Z.
The process will start at the beginning of the first month with the first installment of Rs 2,000 being transferred into Fund Z from Fund A. Assuming the NAV of Fund Z is Rs 10 per unit, Mr Smart will get (2000/10) = 200 units of Fund Z.
When the NAV of the target fund goes up
Now, in the following month, let’s assume the NAV of Fund Z goes up to Rs 12. The swing STP scheme will compare the total market value of the portfolio and Mr Smart’s target monthly investment. So, now the total market value of the portfolio stands at (200 units*Rs 12) = Rs 2,400 and Mr Smart’s target monthly investment for the prevailing month should be (Rs 2,000 + Rs 2,000) = Rs 4,000. This gives rise to a difference in the two numbers.
The swing STP now takes the difference of the market value of the portfolio (Rs 2,400) and the target value, which is Rs 2,400 and the target value of Rs 4000 i.e. Rs 1600 and invests this difference to purchase the units of Fund Z. This means that Mr. Smart has purchased (1600/12) = 133 units of Fund Z.
When the NAV of the target fund goes down
Now, next month the NAV of Fund Z is at Rs 8 and hence the market value of the portfolio stands at ((200 + 133) units * Rs 8) = Rs 2664, however Mr. Smart’s target investment by this month should be (Rs2000 * 3 months) = Rs 6000.
Again the Swing STP will take the difference of the market value of the portfolio and the expected target value (Rs 2664 - Rs 6000) = Rs 3336 and invest it in Fund Z to purchase additional units. So in this month Mr. Smart will get (3336/8) = 417 units will be purchased. As you can see the Swing STP has enabled the investor to pick up more units when the NAV is lower.
The total units held by Mr. Smart at this point is (200+133+417) = 750 units. So the swing STP essentially enables the investor to cushion himself adequately when the NAV is higher and picks up fewer units of the target scheme. Similarly when the NAV is lower the Swing STP picks up more units of the target scheme.
What is the advantage of STP?
The investor can keep his money invested instead of leaving it idle. If he wants a transfer from debt to equity funds, the money is systematically channelized into the desired equity fund under an STP. In this manner, the investor continues to get returns from the debt fund, and can gradually increase his investments in the equity fund.
STP gives the investor the advantage of regular investing which SIPs offer and regular withdrawal offered by SWPs. Since the transfer happens from one scheme to another, the investor stays invested at all times.
Are there any disadvantages?
The investor can transfer money only between the schemes of the same fund house. He can’t pick the best of what the industry has to offer. Tax can also bite, because a transfer is treated as a sale of the source fund and as a fresh investment in the target fund, inviting capital gains tax.