What is a Systematic Handover Plan and how is it different from a SIP? MintGenie explains

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Systematic transfer plan

A systematic transfer plan is an automated way to transfer funds from one mutual fund to another. It is generally preferred by investors who have a lump sum amount saved but want to avoid market timing.

Usually, in this strategy, investors transfer funds from a debt system to an equity system.

How does it work

Suppose an investor has a corpus of 10 lakh saved, but markets are volatile and he doesn’t want to invest in a stock fund at the moment. Thus, the investor invests the entire corpus in a debt fund which is considered safer than equity funds and generally gives a decent rate of return.

He then sets STP for his desired stock funds. So, instead of the money being deducted from his bank account as in a SIP, the fund is transferred from his debt fund to his desired equity at regular intervals.

So, in this scenario, not only does he earn the interest rate offered by the debt fund, which is higher than what the bank account offers, but he can also set the amount he wants to transfer on a regular basis (every month, each week) to its desired equity. .

Thus, equity funds receive a specific amount deposited at regular intervals like in the case of an SIP, but only from a debt fund account instead of a bank account.

However, it should be noted that for this to work, you can only choose mutual fund plans from the same fund house. The transfer can be made between 2 or more plans of the same fund house, and not between several fund houses. An investor can start an STP between 2 mutual fund schemes of Reliance Mutual Fund, but not one mutual fund scheme of Reliance Mutual Fund and the other of Aditya Birla Sun Life.

Why invest in an STP?

The main benefit of starting an STP is to reduce market timing risk. Stock markets can be very volatile, so it’s not always a good idea to invest a lump sum. Investing regularly increases long-term returns due to the power of compounding.

This is why regular payments, whether SIP or STP, are more common and efficient than lump sum payments for an equity mutual fund. In the event that a large corpus is invested in a stock fund by stock market crashes, your entire corpus will be subject to loss, however, in the case of an STP, this risk is amortized since only a portion of your money has been invested in the stock fund for the time being, so that your entire body won’t feel the pinch of such a loss.

Moreover, it is safer to invest a lump sum in a debt fund because your entire corpus will not suffer the impact of market fluctuations. In this way, the investor’s money generates decent returns and is regularly invested in equity funds.

Who should invest?

You should only invest in an STP if you have a huge registered corpus. If you receive regular payments, you can choose the SIP route. Also, investors with a low to medium risk appetite should choose SP, if you have a high risk appetite, you can invest your lump sum in an equity fund. Although the risks are higher, so is the potential for return.

Amount and frequency

Once you have decided which debt fund you want to invest your lump sum money in, you can then choose your destination funds, how often you want money transferred from your debt, and the amount of transfers.

Transfer options in STP re – weekly, monthly and quarterly.

Wallet

Your destination equity fund portfolio should be balanced, diversified and aligned with your financial goals and risk appetite. If you are a low-risk investor, you can choose to transfer your funds from the debt fund to safe, large-cap funds or index funds.

If you want a higher rate of return and are willing to take risks, you can opt for small or mid cap funds. Or you can also choose a combination of quality funds. Transfer little to large cap funds, some to small cap funds, sector funds to keep your portfolio diversified.

STP versus SIP

While STP and SIP involve regular investments in mutual funds, in SIP the money comes from your bank account while in case of STP it is transferred from your debt fund.

Additionally, STPs offer higher returns than SIPs, since you also get returns from your debt fund. Debt funds don’t have a very robust rate of return like equity funds, but they generate decent returns of around 10% and are also immune to market fluctuations. In the case of STP, you benefit from the returns of the debt fund. In the case of SIP, the bank account offers an almost negligible interest rate, so you do not get this advantage.

Third, SIPs are generally open. There is no set time frame for the investment. you can invest as long as you want and withdraw whenever you want. This is not the case for STPs. In this, the amount, as well as the duration of the transfers, are fixed. You need to choose how long you want the transfer to occur for, say 6 months, on a monthly basis, then after 6 months transfers to your destination equity fund will stop.

Taxation is also very different in the case of SIP and STP. In the case of STP, each transfer from a debt fund to an equity fund is considered a redemption into the debt fund and therefore you will be subject to short-term capital gains tax. This is not the case in SIP.

In SIP, you will have to pay long-term capital gains tax and short-term capital gains tax depending on how long you hold your funds.

STP is the best way to invest the lump sum in equity funds, especially in a volatile market environment. Not only do you get returns from the equity fund, but the contribution from the debt fund is pretty decent as well. However, if you don’t have a massive corpus, SIP may be a better investment strategy for you.

This story was first published on MintGenie and accessible here.

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