SYSTEMATIC TRANSFER PLAN: MEANING, FEATURES AND BENEFITS?

In mutual funds, you must have often come across the world, systematic transfer plan (STP). What exactly is this product all about? How is the STP different from an SIP and an SWP pertaining to mutual funds? Firstly, remember that STP is not a product but a combination of two products that maximizes returns and minimizes the tax liability for the investor. Here is a pictorial depiction.

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UNDERSTANDING THE CONCEPT OF SYSTEMATIC TRANSFER PLANS (STP)

Let us look to understand the concept of STP with a practical illustration. Let us assume that you have just sold an ancestral piece of land in your village and have just received a sum of Rs.10 lakhs against the sale. Now Rs.10 lakhs is a fairly large sum and your first priority would be to perhaps invest the money in some good investment that gives you and your family good returns over a longer time frame.

While you are open to the idea of buying stock or equity funds, you are slightly nervous about the volatility in the market due to the ongoing war situation between Russia and Ukraine. One answer for you can be a systematic transfer plan or STP. Instead of investing the entire Rs.10 lakh in an equity fund, you can put the money in a liquid fund or short term fund. Then each month you can sweep a sum of Rs.25,000 into an equity fund over the next 4 years, possibly. This STP will have 2 advantages. Firstly, the idle funds will earn about 4.5% to 5% in the liquid fund. At the same time, you get the benefit of rupee cost averaging (RCA) by investing in the equity fund in a phased and gradual manner.

AN STP CONVERTS A LUMPSUM INVESTMENT INTO A SIP INVESTMENT

That is the precise way to understand an STP. A systematic transfer plan (STP) is all about converting a lumpsum investment into a SIP investment. Just because you have got a lumpsum inflows, does not mean that you have to invest it all in one go. You can use the STP route to convert the lumpsum investment into a SIP to make it more market efficient. Essentially, what you do in an STP is that the entire corpus is invested into a debt fund or a liquid fund and each month a fixed sum is swept into an equity fund.

Normally, it is advisable to park in liquid funds since there is no exit load so you can move funds out at zero cost. Regarding the equity fund part of the story, you are still doing SIP and getting the benefit of rupee cost averaging. The idle money is not really idling under your pillow but earning you more than the bank savings rate. To sum up the STP, your idle money earns higher returns and rupee cost averaging reduces average cost of holding equity funds.

WHY WOULD STP BE BETTER THAN INVESTING IN LUMPSUM?

If you invested in lumpsum on March 20th 2020 and had held on, you would be sitting on pots of money. But, that is easier said than done. Most investors, including the best of investors, cannot time markets with any degree of accuracy. Generally, the STP does better than the lumpsum investment since the idle money is earning higher return and the effective cost of SIP works out lower. Here are some solid justifications to do an STP.

• Buying at the bottom and selling at the top, you can say, is practically impossible. Timing precisely and with consistency is easier said than done. An STP adopts a rule-based approach. When the NAV goes up you gain on your corpus and when the NAV goes down you get more units. In the longer run, this works better than lumpsum investing.
• Over a longer period of time, the STP almost replicates the working of a systematic investment plan (SIP), because that is what it actually is. The STP ensures that you are not forced to time the market due to getting lumpsum payment. At the same time, you reduce the average cost of holdings and enhancing returns and ROI.
• STPs give dual benefits. Firstly, liquid funds earn a higher return on idle funds compared to bank savings accounts and are also more tax efficient compared to bank deposits. At the same time, the STP into equities gives the advantage of rupee cost averaging. This advantage will be more obvious amidst volatile markets.
• A lump-sum investment is a one-time decision, but it is also largely an irreversible decision. In STP, a few investments may be at a high, but that gets neutralized over time. You are not stuck with MTM losses as in lumpsum investing. The calibrated approach of an STP solves reduces the burden of active decision making.
• STPs tend to be more flexible than lumpsum investing. For instance, in lump-sum investing, your returns depend on how well you time the market. That depends on factors like the level of Nifty, P/E ratio, price of entry, choice of fund etc. In STP, you can also change your fund choice if you are not happy with the performance.

In short, STP proffers all the benefits of a SIP even when you get lumpsum inflows.

STP CAN BE MORE TAX EFFICIENT WHEN WITHDRAWING FROM LIQUID FUNDS

This aspect of the STP is often not appreciated but for large STP amounts, this can be a very important factor. A very important consideration us the tax implication of STP. When you invest in a liquid fund and sweep funds into an equity fund, each sweep is treated as redemption of the liquid fund. That is where STP turns more efficient.

STP Decision Chart
Step1 – Money in liquid fund	Step 2 – Sweep from liquid fund	Step 3 – Tax on redemption	Step 4 – STP into equity fund	Step 5 – Build SIP corpus	Step 6 – Edge over dividends
Earns higher yield than bank deposits	No exit load is imposed on liquid funds	Only returns are taxed as capital gains	Gets benefit of rupee cost averaging (RCA)	Power of compounding in your favour	No 30% tax payable unlike in dividends

If you want to do STP, always opt for a growth plan over a dividend. Also, since costs matter a lot, prefer a direct option of the fund than a regular option. Over time, it can make a substantial difference to your overall wealth creation. Since you are doing STP on a growth plan, you only pay tax on the return component and the principal component does not attract any tax.

You can also time the STP in such a way as to enter around end of March and exit in early April after 3 years. This way, you get benefit of double indexation also. Since, liquid funds do not charge exit loads sweeping money out of the liquid fund into equity funds does not entail any cost.

The moral of the story is that even if you have received a lump sum amount, it makes sense to opt for an STP structure and adopt a systematic approach to investing. You can have the cake and eat it too.