Systematic Transfer Plan

Systematic Transfer Plan

A Systematic Transfer Plan enables investors to provide consent to a mutual fund to systematically transfer a certain amount or redeem certain units from one scheme and invest in alternative scheme of the same mutual fund house. Thus, at regular intervals an amount or number of units chosen by an individual investor is transferred from one mutual fund scheme to another of his or her choice. This facility thereby assists in deploying funds at regular intervals. In other words, it can be said that this is an automated way of moving money from one mutual fund to another. This plan is preferred when an individual is interested in investing a lump sum amount but wants to avoid the market timing risk. The most intelligent way of doing Systematic Transfer Plan is by transferring money from a debt fund to an equity fund.

Debt funds are one of the safer forms of mutual funds in which the returns are quite predictable. Equity funds (growth funds) are stock market linked and therefore the returns are uncertain in the short-term. But it tends to give higher return when invested with the long-term perspective.

The key thing to observe here is that Systematic Transfer Plan can be done between the mutual funds of the same fund house (Asset Management Company). For example, one can do Systematic Transfer Plan between two funds of X Fund house or between two funds of Y Fund house etc.

Systematic Transfer Plan is a beneficial tool to average out our investment over a specific period. Whether one should invest in STP or not should be decided based on three factors which are the overall market view, risk profile of the investor and current allocation to equities of the investor.

For example, in order to invest Rs.2 lakh in an equity fund using Systematic Transfer Plan, an investor might first select either a liquid fund or an ultra-short-term fund. After that he or she needs to decide a fixed amount which he or she wants to transfer on daily, weekly, monthly, or quarterly basis. Thus, if an investor decides to transfer Rs.10,000 every three months, it will take twenty quarters (60 months) to complete the investment. In earlier times, fund houses provided for only debt to equity fund transfer within the same firm. Now, an investor can transfer from an equity fund of one Asset Management Company to that of another.

Some of the salient features of Systematic Transfer Plan are:

  • No standard minimum investment amount is set to invest in the source fund. Though, some Asset Management Companies insist on a minimum amount of Rs.12,000 in their systematic transfer plans.
  • An investor is supposed to do at least six capital transfers from one mutual fund to another to apply for a Systematic Transfer Plan. While investors are not charged for entry load, SEBI provides for fund houses to charge exit load subject to the condition that it does not surpass 2% cap.
  • Systematic Transfer Plan enables a disciplined and lucrative transfer of funds between two mutual fund schemes. In most cases, Systematic Transfer Plan is initiated from a debt fund to an equity fund.
  • While a Systematic Transfer Plan is a good investment strategy, investors must be completely aware of the tax implications and exit loads on the transfer. Every transfer made from one fund to the other is considered as redemption and a new investment. The redemption is usually taxable. The money which is transferred within the first three years from a debt fund is subjected to short-term capital gains tax (STCG). But even after considering this tax aspect, the returns earned would be higher than those in a bank account.

The Systematic Withdrawal Plan has the following benefits:

  • The concept of Rupee Cost Averaging where a Systematic Transfer Plan averages out the cost of investment by buying lesser units at higher Net Asset Value and more units at a lower price. For example, if the NAV of the fund is Rs 12 in the first month, Rs 10 in the second month and Rs 8 in the third month, a Systematic Transfer Plan will get him an average price of Rs 10. Whereas, a lump sum in the first month would get him a price of Rs 12.
  • An investor who has obtained a lump sum amount, say from the sale of a property or through a bonus at work can invest in mutual funds through Systematic Transfer Plans instead of lump sums investments. For example, a person who has obtained Rs 60 lakh by disposing a house can invest this amount in 1-2 low risk liquid funds. From these liquid funds, he or she may initiate Systematic Transfer Plans into equity funds over the next 3-4 years. This is comparatively less risky than investing the whole amount of Rs 60 lakh on a single day or over a span of few days.
  • There is a scope for higher return in a Systematic Transfer Plan because here an investor will be initially investing the lump sum in a debt fund like a liquid fund. Liquid funds usually yield higher returns of around 8%-9% as compared to the meagre 4% returns earned in a bank savings account.
  • One of the benefits of the Systematic Transfer Plan is the earning steady returns. This is because the amount in source fund that is debt fund generates interest until an investor transfers the whole amount.
  • Systematic Transfer Plan also plays a crucial role in managing risks. For example, say, an investor initiated a Systematic Investment Plan for 30 years into an equity fund for retirement planning. As he or she is near to the retirement, they can start a Systematic Transfer Plan to prevent loss of fund value. Here, the fund house is instructed to transfer a fixed amount from the equity fund to a debt fund. In this way, by the time an investor retires, he or she would have shifted all the accumulated corpus to a safer haven.
  • An investor’s portfolio should find a healthy balance between the equities and debt. A portfolio is rebalanced by transferring investments from debt-to-equity funds or vice versa by using a Systematic Transfer Plan.

An investor is supposed to fill up a Systematic Transfer Plan form and submit it at the office of the concerned mutual fund house (Asset Management Company). For online investing, Nirmal Bang gives a digital platform to start the Systematic Transfer Plan completely hassle free. The things which need to be specified in the Systematic Transfer Plan form are the amount of the Systematic Transfer Plan, date of the Systematic Transfer Plan and the duration of the Systematic Transfer Plan. For example, a Systematic Transfer Plan of Rs 10,000 on the 16th of each month for a tenure of 2 years.

The factors which govern the applicable tax on a Systematic Transfer Plan are the type of fund investors are transferring from and the tenure of their holding period. This is because a Systematic Transfer Plan transfer is considered as a redemption and taxed accordingly.

In case of equity funds, the transfers that happens within a year of purchase will be taxed under the Short-Term Capital Gains Tax (STCG) at 15%. The transfers that take place after duration of 1 year, with amount more than Rs 1 lakh will be taxed under the Long-Term Capital Gains Tax (LTCG) at 10%.

In case of debt funds, transfers that happens within 3 years of purchase are taxed as per individual’s slab rate and transfers that happens after duration of 3 years are taxed at 20% post giving investors the benefit of indexation. Indexation lowers investors’ tax liability to account for inflation.

Generally, majority of the Systematic Transfer Plans are from liquid funds and thus taxed per individual’s slab rate. However, the gains or returns in such kind of funds are also around 7-8% and thus the actual tax payable from Systematic Transfer Plans is not very high. According to the First-in-First-Out system of accounting, every Systematic Transfer Plan transfer is considered as part income and part capital.

For example, suppose that an investor has invested Rs 2 lakh in a liquid fund and it has grown to Rs 2.2 lakh in 6 months. Investor starts a Systematic Transfer Plan from the 7th month onwards of Rs 20,000 per month. In this scenario, Rs 18,000 which is 90% of each transfer or Systematic Transfer Plan instalment is capital and Rs 2,000 which is 10% is capital gains or income. This income component will be taxed at investor’s slab rate. Suppose tax rate is equal to 15%. In this case, investor will have to pay a tax of Rs 300 on every Systematic Transfer Plan instalment.

  • What is Systematic Transfer Plan?
  • A Systematic Transfer Plan enables investors to provide consent to a mutual fund to systematically transfer a certain amount or redeem certain units from one scheme and invest in alternative scheme of the same mutual fund house.

  • Which funds are better debt funds or equity funds?
  • Debt funds are one of the safer forms of mutual funds in which the returns are quite predictable. Equity funds (growth funds) are stock market linked and therefore the returns are uncertain in the short-term. But it tends to give higher return when invested with the long-term perspective.

  • What are some of the features of Systematic Transfer Plan?
  • Some of the features are as follows:

    1) No standard minimum investment amount is required.

    2) Systematic Transfer Plan enables a disciplined and lucrative transfer of funds.

    3) Returns in Systematic Transfer Plan is higher as compared to that in bank savings account.

  • What are some of the benefits of Systematic Transfer Plan?
  • Some of the benefits of Systematic Transfer Plan include Rupee Cost Averaging, scope for higher return, earning steady returns, risk management and portfolio rebalancing.

  • How the taxation works in case of Systematic Transfer Plan?
  • The factors which govern the applicable tax on a Systematic Transfer Plan are the type of fund investors are transferring from and the tenure of their holding period.