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Systematic transfer plans cut risks associated with deploying huge funds in one shot

A Systematic Transfer Plan (STP) is the process of shifting funds from one asset class to another with the objective of mitigating risks associated with investing. Usually, you should look at an STP when you receive a lump sum amount, and want to minimise the risks associated with investing it in an equity mutual fund in one shot. So, under an STP, it is advisable to put the money in a liquid fund with dividend option and then transfer a predefined sum of money from this fund to an equity fund of your choice at a pre-fixed interval.

There is another type of STP, under which only the appreciation in the liquid fund in this example or at times the money could also be kept in an income fund), is transferred to an equity fund. On the other hand, if you are looking to invest from an income source which is regular, you should go for an SIP, and not STP.

For risk-averse investors

Financial planners and advisors say an STP is mostly advised to a conservative investor who wants to enter a volatile asset class but is not very sure about the valuations. An STP is for a person who wants to invest in equity, but is not very sure about the direction of the market. This (STP) could be advised to an investor who wants to average out his (or her) investments in a volatile period. Or to a very risk-averse person who wants equity in the portfolio only as a kicker.

The situation could be that you have got some lump sum amount but are not very sure about the direction of the equity market, or the valuations that the market is offering. Then you should go for an STP, which deploys the money in a systematic way. For example, you receive a one-time payment of Rs 5 lakh and you want to invest in an equity fund. And you are in a market condition similar to today: valuations are neither very cheap nor rich.

One of the ways that financial planners suggest is that you put the money into equity funds over the next 50 months. So, you would invest Rs 10,000 in equity funds every year. Here, Mittal suggests that you should put the first year's total transfers, that is Rs 1.2 lakh, into a liquid fund with dividend option, and the balance Rs 3.8 lakh in the growth option of an accrual fund. In the first year, your STP would run from the liquid fund, and from the second year onward, it could be from the income fund. This way, there is every chance you can minimise your tax outgo, as well as costs in terms of exit loads, Mittal points out.

Cutting exposure systematically

STP is also used to reduce exposure to a risky asset. For example, an investor who is nearing retirement may want to reduce the equity part in the portfolio every year. In this case, he/she can start as STP and shift part of the portfolio every year to a debt fund.

At times, mutual fund houses that offer this facility to investors also allow for a pre-determined trigger to be set by the investor for automatic transfer of funds. For example, you set a 15% return as a trigger in your equity fund portfolio. That would be the level at which all gains would be transferred to a debt fund, which is less volatile in nature than the
equity fund.

Financial planners also say that, while STP is a good option for investors in some particular situations, what matters is the quality of the equity scheme where the money is being invested. Usually, STP money aimed at an equity fund should be invested in sectoral funds, which are most volatile among equity funds.

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