Many readers are asking me to provide the details about good Mutual funds to invest for lumpsum amounts. But I suggest Mutual funds are suitable for investing in systematic approach. Do we have any best way to invest lumpsum amounts in Mutual funds and get better and consistent returns? Yes, we have Systematic Transfer Plan (STP), which is the most suitable option to invest lumpsum amounts. The STP process transfers funds in one Mutual Fund (generally Debt Mutual fund) into another Mutual fund (generally Equity Mutual fund) of same fund house at regular intervals systematically . This is the proved way of investing lumpsum amounts in Mutual funds. We will see the complete details about STP and the best Mutual funds to invest through STP approach for the year 2021.
What is Systematic Transfer Plan / STP?
Systematic Transfer Plan is suggested to invest lumpsum amounts into a Debt Mutual fund and on periodic basis certain amount will be transferred to an Equity fund of same house house systematically. Depending on the lump-sum amount, the investor can decide the period over which he wants to deploy the money in the market. Typically, the larger the amount, the longer the time period. Also, based on the risk appetite, the investor can go the suitable risk profile Mutual funds as his/her target Mutual fund. The basic idea behind an STP is to earn a little extra on the lump sum while it is being deployed in equity, since debt funds provide better returns than a normal savings bank account.
STP has some similar features of Systematic Investment Plan (SIP). One of the differences between STP and SIP is the source of investment. In case of the former, money is transferred usually from a debt fund and in case of latter; it is the investor's bank account. Since it is similar to SIP, STP also helps in Rupee Cost Averaging. A good debt Mutual fund always yields better returns than a Bank Account, hence STP always yields better returns than SIP.
Why Systematic Transfer Plan / STP?
- To invest lumpsum amounts in Mutual funds and to earn additional income over the Debt Mutual funds
- Money invested in debt fund generally yields returns till the time it is transferred to equity fund. The returns in debt funds are usually higher than savings bank account and aims to assure relatively better performance.
- The selection of Target Equity Mutual fund is based on your risk profile. Generally Small cap Mutual funds earns better returns than Large cap Mutual funds during Markets upwards journey.
- Systematic Transfer Plan (STP) enables a disciplined and planned transfer of funds between two mutual fund schemes. In most cases, investors initiate an STP from a debt fund to an equity fund.
- The returns made via STP are pretty reliable. This is because the amount in source fund (debt fund) generates interest until you transfer the entire amount.
- STP can also be initiated from Equity Mutual fund to a Debt Mutual fund of same fund house. Generally, when your financial goals are nearing to your timelines, then you can do STP from the existing Equity Mutual fund to Debt Mutual fund to reduce the Market risks.
- An STP re-balances the portfolio by moving investments from debt to equity funds or vice versa.
Things to Remember While Setting STP
- STP happens between the mutual funds of the same fund house (AMC)
- STP is executed as redeem in one fund and purchase in another, on the same day
- Choose source funds that have no exit load
- Choose destination funds according to your investment goals and risk profile
- Every transfer from one fund to another is considered as redemption and new investment. The redemption is usually taxable.
- The money transferred within the first three years from a debt fund is subject to short-term capital gains tax (STCG).
- But even with this tax aspect, the returns earned would be higher than those in a bank account.
When to Go for STP?
- Go for STP only when you have lumpsum amounts for investing which are not required in near future.
- Go for STP when your financial goals are nearing in the existing Equity Mutual funds
- Go for STP to rebalance your Mutual fund portfolio
