How much money you allocate to which mutual fund scheme depends on an interplay of several factors, such as life’s financial goals, availability of funds and the the stage of life. These, and many other factors, determine the quantum of funds you decide to invest into a fund scheme, and also the duration for which you stay invested there.
As the time rolls on, you may decide to transfer some of the funds from one scheme to another scheme. One of the easiest and convenient ways to do is via systematic transfer plan, or STP.
Mutual funds enable investors to increase in allocation to an asset class using the systematic transfer plan (STP). This way, investors can transfer investments from one scheme to another.
One can set up an STP to carry out asset allocation in multiple ways:
To be able to gradually invest a sum into equity fund, some investors park their corpus in a low-risk debt fund, and then transfer the money in regular intervals to the target equity fund. This is a way to stagger the price levels at which equity units are bought and until that happens, the corpus is delivering a fixed return via a safe debt scheme.
Alternatively, one can also withdraw the gains from equity fund units and move the receipts to a low-risk debt fund on a regular basis.
There are different ways to set up an STP:
Fixed STP: In a fixed STP, a fixed amount is regularly transferred from one scheme to another.
Flexi STP: In this STP, investor has the liberty to transfer a variable amount.
Trigger STP: In the case of trigger STP, amount is transferred to another scheme only when a specific event takes place, for instance when profit earned on one scheme is over and above of a pre-defined amount.
How to set up an STP: First of all, investors need to fill up STP enrolment form and enter the key details which include the source and target scheme names, STP variant name, amount to be transferred, period of STP and the frequency with which it needs to be done. STP can be set up by filing in these details on the mutual fund’s portal.
Miscellaneous costs: Investor must understand that STP entails exiting one scheme and investing into another. The income tax accrued on the redemption of one scheme will be subject to capital gain depending on the period for which fund units were held.
Also, there could be an exit load on the redemption. However, there are some fund houses which tend to waive off exit load in case of STP.