Systematic Transfer Plan- Ideal way to Move to Equity

It was a big day for Rahul. After several weeks of deliberation, he was finally going to take the leap and invest in mutual funds (MFs). A lot of preliminary research had shown him that mutual fund schemes invested in a variety of funds, both debt and equity. Being a first-time investor, Rahul was understandably risk-averse and wary of equity funds. This is because the general consensus is that although it delivers higher returns in the long run, equity is a riskier investment option.

So, Rahul went ahead and invested Rs. 1 lakh in liquid debt funds. He tracked his NAV consistently and was glad to see that his investment remained stable. One day, on a whim, he ventured out of his comfort zone to see how the equity funds in the scheme were performing, and he was surprised to see that the market was moving in their favor. However, with all his capital locked up in debt funds, he believed he was at a dead end. That is, until the idea of a Systematic Transfer Plan (STP) came to his rescue.

What is a Systematic Transfer Plan?

A Systematic Transfer Plan is an investment strategy wherein you periodically and systematically redirect your funds from one mutual fund scheme to another. This is different from a Systematic Investment Plan (SIP), where you periodically invest in mutual funds with capital that you source from your income or your savings. In STP, however, the source of your investment funds is the money you’ve invested in another MF scheme.

Generally, as an investor, you may decide to adopt the STP strategy because of any one or more of these 3 factors:

• Your allocation to equity funds may not be sufficient
• Your risk appetite may have changed
• The market may be moving favorably

In Rahul’s case, for instance, he decided to use the STP approach and move his capital between different mutual fund schemes because he wanted to take advantage of market movements. You may also want to try this approach either because of the same reason, or perhaps because you may want to venture into the high-risk-high-reward zone that equity funds come under. With the mutual fund scanner available on the Moneyfy app from Tata Capital, you can screen different funds yourself and pick the right equity fund to move to.

How to use the Systematic Transfer Plan to move gradually to equity?

You now know what a Systematic Transfer Plan is all about. However, to truly understand how it works and how you can use this strategy to move into equity investments, it’s essential to get into the details. It’s quite simple, in fact, and only involves two steps, as explained below.

• Step 1: Invest a lump sum amount in liquid mutual funds or ultra-short-term debt funds.

• Step 2: At regular intervals, transfer a fixed (or varying) amount systematically from those liquid or ultra-short-term debt funds to equity funds.

To understand this better, let’s look at what Rahul did. If you’ll recall, he had initially invested Rs. 1 lakh in liquid debt funds. Now, in order to move to equity, he decided to adopt a Systematic Transfer Plan and redirect around half his capital (Rs. 50,000) into equity funds. Rahul chose to transfer Rs. 5,000 systematically on a monthly basis. On the whole, it took him around 10 months to move half his corpus into mutual fund schemes that invested in equity. And now, he has a balanced investment portfolio that consists of both debt funds and equity funds.

You too can adopt a similar strategy to move your funds into equity-oriented mutual fund schemes gradually. Depending on what is convenient for you and on what your Asset Management Company offers, you can choose to make your transfers on a weekly, monthly, or quarterly basis.

Additional Read:- Is ELSS a Wealth Creation & Tax-Saving Tool?

What are the different types of Systematic Transfer Plans?

There are basically three different types of STPs:

• Fixed STP
• Capital appreciation STP
• Flexi STP

Fixed STP

In a fixed STP, you transfer fixed sums of money each month from one fund to another. This is the plan that Rahul followed, since he moved Rs. 5,000 each month for 10 months.

Capital appreciation STP

In this plan, you first invest a lump sum in a liquid fund or a short-term debt fund. Then, you transfer only the profit segments from this investment and invest those amounts in an equity fund periodically.

Flexi STP

A Flexi STP gives you the choice to move variable amounts between different funds periodically. One part of this variable amount will be fixed, and the variable component is over and above this minimum amount.

Additional Read:- Understanding Mutual Fund Terminologies

Conclusion

As in Rahul’s case, STP is a useful investment strategy that helps both new and seasoned investors take advantage of market movements. It’s also helpful if you have a lump sum amount now and wish to invest in equity-oriented mutual fund schemes but are wary of entering that market at one go. In such a scenario, you can park the lump sum amount in a liquid or debt fund, and then use a Systematic Transfer Plan to transfer your capital into your target equity fund at regular intervals. . Our Moneyfy investment app gives you an easy way to invest in liquid funds, so you can seamlessly execute an STP. With a host of other user-centric features, Moneyfy is a one-stop shop for all your mutual fund investment needs.