How to get the most out of a Systematic Transfer Plan (STP)

What is a Systematic Transfer Plan?

A Systematic Transfer Plan (STP) is an investment tool, which allows mutual fund investors to invest a lump sum amount in one scheme (Source scheme) and then transfer a fraction thereof at pre-defined frequencies regularly to another scheme (Target scheme). Typically, Liquid Funds, Money Market Funds, Ultra Short term Debt Funds, etc. are used as source schemes and equity or equity-oriented hybrid funds are preferred as target schemes. However, STP can also be used to transfer money from equity schemes to debt schemes.

Why should one opt for STP?

- Disciplined approach of deploying money systematically or in a staggered manner in equity funds, especially when an investor has a sizeable investible corpus.

- STP aims to average out cost of investment as units are accumulated gradually over a period of time at different NAVs.

- Hassle free change in asset allocation from debt to equity and vice versa.

- Source fund continues to generate returns.

- Removes emotional bias from decision-making process.

STP in action - An illustration

Sameer, a 24 year old software engineer from Mumbai, inherited an ancestral property, a plot of land on the outskirts of Nashik. On receiving a favorable deal for the plot from a resort owner, he sold the plot last month and received a consideration of Rs 65 lakhs. Although Sameer is a well read man with a modern lifestyle, his investment decisions are influenced by his predecessors. Both, his father and grandfather invested in conventional fixed deposits/recurring deposits. Now, Sameer faces a catch-22 situation. He has a huge corpus to invest, but does not have the experience or the inclination to invest this sum in equity markets. At the same time, he is aware of how equity markets could significantly outperform traditional investment avenues like fixed deposits / recurring deposits in the long run.

What can Sameer do here? Can he invest Rs 65 lakhs in equity markets and face the risk of incorrectly timing the market? Can he invest this sum in Fixed Deposits in a low interest rate environment and face the risk of failing to achieve his financial goals?

This is where STP aims to offer a solution. Sameer can invest this large corpus in liquid or ultra short term debt schemes with an STP to transfer periodically to desired equity schemes. This could allow Sameer to gradually increase his exposure to equity markets and at the same time, earn reasonable returns on liquid/ultra short term debt schemes.

Further, his liquidity needs would be taken care of as withdrawing money from such schemes is convenient and usually does not attract any exit load, although returns would be subject to
applicable taxes.

It’s worth noting that Sameer’s case is not an isolated one. There are many of us who face this conundrum at some point of time. Following are few of the instances, where STP could merit due consideration:

- Sale proceeds of property.

- Bonus received at year end.

- Inheritance.

- Large investment in fixed deposits/saving accounts needing a shift in allocation to equities.

Conclusion

STP can also be used to achieve your long-term financial goals, such as your child's education or creating a retirement fund. You can shift from debt to equity gradually to move to an aggressive portfolio in the initial stages of this journey. Subsequently, when you are nearer to your goal or are closer to your retirement age, you can shift from equity to debt / hybrid funds in a phased manner.

Use of STP in a staggered manner is one of the best investment strategies for investors with a sizeable investible amount. It helps investors with an aim to mitigate risk of capital erosion due to unfavorable market timing. However, investors can reap the benefits of STP only if they follow the strategy consistently. Discontinuation of STP abruptly on account of short term movement may prove detrimental to an investor’s financial planning.

Views expressed herein are as of 13th August 2021, involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. HDFC Mutual Fund/AMC is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions and alone shall be responsible.