By: Tavaga Research
To really understand a systematic transfer plan (STP), let’s first try and deconstruct a popular way to invest in exchange-traded funds (ETFs) and mutual funds known as Systematic Investment Plan (SIP). SIPs allow investors a disciplined approach to investing, where they can invest a regular amount every month. Also best known for rupee cost averaging, SIPs are probably the best way to handle volatility in investments.
For instance, suppose you intend to make a monthly investment of INR 10000 and decide to take the SIP route, then, every month this amount will be debited from your account and invested in the funds that you have selected at the inception.
SIP calculator facilitates an investor to project the returns on the mutual fund investments made through the SIP route. The SIP Calculator in India offered by Tavaga gives a return estimate on mutual funds and ETFs.
STP, on the other hand, is a variant of SIP that allows investors to gradually transfer assets from one scheme into another scheme within the same asset management company.
If an investor is in possession of a lump sum amount to invest, registering a SIP is difficult. Instead, the investor is left with only one choice – To invest the lump sum amount in a mutual fund or an ETF and wait for them to deliver superior returns.
More importantly, a lump sum investment in equity and debt funds can be highly risky. So, asset management companies allow investors to transfer systematically a fixed sum from one fund to another through an STP.
STP is a facility that gives the unit holders an opportunity to transfer a fixed sum at regular intervals from one scheme to another. The facility helps investors to rebalance their investment portfolio by switching seamlessly between different asset classes. They can be used to reduce volatility and help realize financial goals.
Suppose an investor earns a lump sum through the sale of a property. The investor can choose to invest the entire amount in a low-risk money market or a liquid fund and then systematically transfer a fixed sum into an equity fund, ensuring that he gains the benefits of rupee cost averaging while earning slightly higher returns than bank deposits. By regularly transferring money into an equity fund, the investor can stop worrying about the market level.
For instance, if the investor earns a lump sum of INR 5,00,000, and invests that in a liquid fund, they can then arrange to transfer, each month an amount of INR 25,000 into an equity fund so that over the next 20 months the investor makes the best of the volatility and manages to reduce the cost of acquisition. Therefore, these plans are suitable for investors who have lump sum money and wish to invest in equity funds but are wary of timing the markets.
Tavaga is everything you need to start saving for your goals, stay on track, and achieve them in time.
Download Now:
An STP facilitates the automatic transfer of money from one fund to another. The investor is obligated to initially choose the source fund (outflow) and the target fund (inflow).
There are three basic steps to do an STP:
STPs can be done from an equity fund to a debt fund or vice versa. When the markets are performing badly, it might be a good idea to use an STP as a tool to gradually switch your investment from debt to equity.
Similarly, when the markets are at a peak and you intend to lock-in the returns to avoid the risk arising from a downward correction, you can use an STP to switch from an equity fund to a sovereign-backed debt scheme.
For an STP, there has to be at least six capital transfers from one fund to another. The AMCs cannot charge any entry load during any capital transfer; however, SEBI permits them to charge an exit load not exceeding 2 percent.
Each transfer from one fund to another is considered as redemption and if there are any capital gains, they will be subject to taxes depending on the fund type.
Long-term capital gains (LTCG) for debt funds are taxed at 20 percent with indexation benefits, while the short-term gains are taxed at the slab rate applicable to the investors.
On the other hand, equity funds are tax-exempt from LTCG tax up to INR 1 lakh and are charged at 10 percent above if the profits exceed 1 lakh. STCG on equity funds are taxed at 15 percent. So, these considerations have to be kept in mind while deciding about STPs.
The investor can simply instruct the fund house to transfer a defined amount from the equity fund to a debt fund.
For risk-averse investors, the transfer of funds is mainly to sovereign backed debt securities, while equity instruments are meant for investors with a willingness to take some risk.
Balanced advantaged funds (BAFs) do what their name suggests- they strive to achieve a balance between equity and debt allocations, depending on the valuation metrics, market conditions, and the fund ideology to achieve the best return at a given risk level. They do this in a dynamic manner as opposed to the static allocation of other hybrid funds. Therefore, these funds are also called dynamic asset allocation funds.
Similar to STPs, balanced advantage funds are perhaps the most suited investment vessel in an uncertain market. These funds dynamically manage the debt and equity part of the corpus-based on the market conditions, things that STPs help do. But the difference between the two lies in the fact that the switching decisions under STPs are taken by the investors themselves, but under balanced advantaged fund managers take that decision for the investors.
Tavaga, a SEBI Registered Investment Adviser (RIA), provides monthly investment advisory to its clients about the optimal ETF portfolio, keeping in mind their risk appetite and goals.
Similar to balanced advantaged funds (BAFs), Tavaga, considering several factors, shuffles their client’s portfolios for them, relieving them of the hassles associated with STPs where investors have to shuffle their portfolios themselves.
More importantly, ETFs don’t have any exit load and a lower expense ratio as compared to the BAFs and can, therefore, over a period of time, lead to higher returns.
While STP and SIP are two different investment methods with various benefits and pitfalls, the concept of STP involves many complications with investor subjected to various charges on redemptions from the source fund, as discussed above.
Robo adviser such as Tavaga allows an investor to ignore the complications involved in STPs of mutual funds, and instead, follows the right asset allocation mix by sticking to the mantra of glide path investing into ETFs.
Managing your finances in today’s digital landscape can feel a bit like juggling flaming swords…
When you think about all the big financial goals that stretch out over the course…
Despite its ups and downs, cryptocurrency is still a leading financial trend. Many have praised…
There is no denying that life can be difficult. It can be challenging to balance…
There is a method in the chaos of intraday trading with careful strategies and rules…
Investing is a powerful tool that can help individuals grow their wealth and achieve their…
View Comments
Very well written !
Investment companies have marketed it so well that everyone seems to see all positives but no cons. But as accurate for anything you do or plan, it’s essential to know about the disadvantages of SIP. Read this blog, to know more. https://journvio.com/disadvantages-of-investing-in-a-sip-systematic-investment-plan-what-you-can-do-about-it/