What is Systematic Transfer Plan and how to use it to your advantage
Systematic Transfer Plan (STP) can be used for rebalancing your portfolio and make tactical allocation in equities.
Dec 2023
3 mins read
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Looking to invest lump sum in Equity Funds but not sure if you should invest all in one go because you fear that the markets may correct? Typically, many investors would opt for Systematic Investment Plan (SIP) to invest in Equity Funds to average out their investments. In case of SIP, your money is deducted monthly from your bank account. The surplus cash lying in your bank account would earn 3% - 3.5%, depending on the bank. Instead, you can invest the money lumpsum in a Debt Fund which could yield more than savings account.
So how do you go about it?
Invest lump sum in Liquid Fund or Ultra Short Term Fund. Opt for a Systematic Transfer Plan (STP) that will allow you to transfer a fixed amount from Liquid Fund to an Equity Fund.
How does it benefit?
Your surplus cash in Liquid Fund or Ultra Short Term Fund is earning more than savings account and at the same time you get the benefit of averaging out your investments in an Equity Fund. Thus, you don’t need to time the market by waiting for the right opportunity to enter the market. Remember the old adage – it's not about timing the market, but about time in the market.
You can also use STP to rebalance your portfolio. For instance, if your target allocation in equity goes up from say 50% to 60% due to market rally, you can bring it back to 50% by transferring the gains through STP in a Liquid or Debt Fund. Similarly, you can make tactical entry into Equity when markets correct by doing an STP from Debt Fund to Equity Fund.
Taxation
When you initiate Systematic Transfer Plan from one scheme to another, there are tax implications as these transactions are treated as redemptions from the source scheme. The applicable tax depends on the holding tenure and the fund category.
Funds which invest more than 35% but less than 65% equity are eligible for indexation benefit and are taxed at 20% LTCG. Balanced Hybrid Fund, which invest in the range 40% to 60% in equities fall under this category of taxation.
(Tax on Debt Funds appliable on investments done on or after April 1, 2023.)
Few things to remember:
- You can initiate STP from an Equity Fund to a Debt Fund and vice versa.
- The frequency of STP can be fortnightly, monthly, and even quarterly.
- STP can be done within the same fund house schemes from open-ended schemes.
- In technical parlance, the scheme in which the lump sum investment is made is source scheme/transferor scheme. The scheme to which the amount is transferred is called destination scheme/target scheme/transferee scheme.
- Check the exit load duration before initiating STP.
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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
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Email: care@pgimindia.co.in
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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