Systematic Transfer Plan is a useful mechanism to manage asset allocation

Systematic Transfer Plan (STP) is a mechanism by which an investor is able to transfer a fixed or variable amount from one mutual fund scheme to another mutual fund scheme. STP is primarily used by investors to transfer from debt funds to equity funds and vice versa. If you are bullish about the market, at the same time concerned about short term volatility, you can use STP to withdraw fixed amounts from your debt fund and transfer to equity funds on a regular basis over several months. On the other hand, if you think that the market is near its peak and a deep correction is imminent, you can withdraw fixed amounts from your equity fund and transfer to your income fund using an STP.

Types of Systematic Transfer Plan

There are two types of Systematic Transfer Plan (STPs):-

• Fixed STP

  in which investors can transfer a fixed amount at regular intervals from one scheme to another



• Capital Appreciation STP

  in which investors can take out the profit of a scheme and transfer it to another scheme

How to use STP to manage your asset allocation

1. Defence against volatility:

   Your asset allocation is a dynamic process. It depends on financial goals, risk tolerance and financial situation. You can use STP to manage your asset allocation in an efficient way. STP is your defence mechanism against adverse impact of market volatility. Let us understand with the help of an example. Assume you started a monthly SIP of र 3,000 in ICICI Prudential Top 100 fund with an investment horizon of 10 years. You had planned to shift your investment to a monthly income plan at the end of your investment horizon. By January 2008, the accumulated of your SIP investment is would be over र 13 lacs. But due to the sharp fall in the market in 2008, the value of your investment in January 2009 was र 6.5 lacs. Let us evaluate two scenarios:


• If you redeemed all your units of ICICI Prudential Top 100 fund January 1, 2009 and invested in ICICI Prudential MIP 25, you would have bought about 44,140 units of ICICI Prudential MIP 25 on January 1, 2009


• If you initiated an STP to transfer the accumulated corpus of र 6.5 lacs in ICICI Prudential Top 100 fund over 2 years in 24 fixed monthly instalments to ICICI Prudential MIP 25, you would have bought 58,120 units of ICICI Prudential MIP 25, including the residual corpus of in ICICI Prudential Top 100 fund after 2 years. You would have benefited from the rise in equity markets in 2009 and 2010, through the use of STP.


• The value of 14,000 additional units of ICICI Prudential MIP 25, as a result if the STP, is over र 4.1 lacs at today’s NAV.



2. Types of schemes:

   Typically STPs are used to transfer for liquid funds to equity, but investors can use STPs to transfer between other schemes depending on their asset allocation needs. For example investors nearing retirement can use STPs to shift their investment from equity funds to long term income funds or monthly income plans. Investors need to ensure that both the transferor scheme (scheme from which you are transferring) and the transferee scheme (scheme to which you are transferring) belong to the same fund house (AMC).



3. Tenure of STP:

   There is no fixed tenure for STP. The tenure of an STP should be determined by the investor’s financial objectives. If the investor wants to transfer from a liquid to equity fund, the tenure of the STP should be 6 months or less. While STP can protect you from volatility, a long STP tenure, when transferring from liquid to equity may prevent you from earning high returns. Your returns will depend on how long your funds are deployed in equity. There are no hard and fast rules as to how long, the tenure of STP should be. You should consult with your financial advisor and make the best decision based on the market conditions and your financial objectives.



4. STP needs discipline:

   Just like systematic investment plan (SIP), STP also needs financial discipline. You should not break your STP because of short term market movement, because it may end up harming your long term investment returns. For example, if you have initiated a 6 months STP from liquid to equity fund, you should not break your STP just because the market rises or falls sharply. STP is a defence mechanism against volatility. If you break your STP based on sharp market movements either ways, you are trying to time the market at a time when it is difficult to forecast market levels. The primary objective of an STP is to preclude the need of market timing.

Conclusion

In this article, we have discussed how you can use STPs to effectively manage your asset allocation. Predicting short term market movements is extremely difficult, and this is where STP is very useful in helping you to optimize the return on your investment. If you are rebalancing your portfolio to shift your asset allocation as per your financial objectives and risk tolerance levels, you should evaluate if you want to use STP to effectively manage the shift in your asset allocation.