If you want to shift your corpus from one mutual fund to another within the same fund house, then you should consider a systematic transfer plan (STP). It will allow you to move your money from one fund scheme to another, according to your requirement and convenience.
In fact, you can start an STP with your mutual fund distributor or online broker just by filling out a form. You will have to select the type of STP, condition, and the destination of your funds.
Types Of STPs
Flexible STP: In this option, the total amount of funds which you want to be transferred is sent at your convenience. You can switch from a debt mutual fund to an equity-based fund in accordance with the market volatility.
Flexi SIPs work on a predefined formula set by the fund house. It allows you to switch from one scheme to another (typically debt to equity) in accordance with the market condition. When the market is up, a lower amount gets invested, and when the market is down, a higher amount is invested. This helps one in taking advantage of market volatility.
If the interest rates are in the rising trend, it’s best to invest in debt fund schemes, as the interest rates are very high, and the returns from equity won’t be able to match up with the returns generated by equity schemes, in the short term.
Similarly, when inflation is down, equity returns can outperform the debt schemes. Based on the interest rates scenario, an investor can switch between equity and debt schemes. Depending on market volatility and calculated forecasts about a scheme’s success, an investor may desire to transfer a larger portion of his or her existing fund or vice versa.
Fixed STP: This option will help you to move a fixed amount from one scheme to another on a regular basis. This can be used to transfer funds from a liquid scheme to an equity scheme to maximise prospective returns while maintaining enough liquidity. Fixed STP can be utilised by investors who have a large sum of money, but do not want to expose themselves to riskier asset classes like equity all at once.
Capital Appreciation STP: If you want to withdraw all the appreciation amount made from a mutual fund and invest in a different scheme, capital appreciation STP should be right for you. Your capital will stay in your invested mutual fund, while the profits will get invested in a different fund.
To get the most out of your debt fund schemes, you can place a capital appreciation STP on your debt fund and transfer the same to an equity scheme of the same fund through this STP. Thus, you can switch appreciated capital from debt to equity, to generate higher growth. This way, you can stay invested in a liquid fund or emergency fund, and switch your appreciation capital into equity for higher growth.
Swing STP: This feature enables investors to establish a target market value for their investment in the target scheme on each transfer date. Funds are transferred between schemes based on the intended investment value and the actual value of the assets. This tool allows investors to pre-set their exposure in the schemes by enabling reverse transfers into the source scheme, if the market value is greater than the intended amount.
Points To Remember While Opting For STP
STP can be a useful tool to dodge market volatility and make the best out of interest rate hike or falling scenarios, and reduce the risk to a certain extent. STP should be used only if you have a large sum of money to invest that you will not require in the near future.
It’s also important to monitor the underlying assets and their phases at all times, when opting for a flexible STP. Transferring capital from equity funds would be unwise if the market is at its top. Moreover, each STP withdrawal is subject to taxation as per the usual taxation norms that is levied in equity and debt funds when redeemed under a certain period of time.