Friday, 10 June 2016

What is Systematic Transfer Plan ? How Does it Work ?

Systematic Transfer Plan is a Strategy where an investor transfers a fixed amount of money from one category of fund to another,usually from a Debt fund to an Equity Fund.
Benefits-of-Systematic-Transfer-Plan


Investing a Lump sum amount in stocks of equity mutual fund could be dicey for some investor considering the volatility of equity markets and returns in equity mutual fund is linked to the performance of stock markets. STP helps to keep a balance of risk and return. Further, it helps investor invest in equity at appropriate time and till then, investor enjoy debt returns.

Benefits of Systematic Transfer Plan (STP) 


Consistent Return : Money invested lumpsum in debt fund earned interest till the time it is transferred to equity fund. The returns in the debt fund are usually higher than returns from savings bank account and assure relative performance.

Averaging of Cost : STP has some integral features of systematic investment plan (SIP). One of the difference between STP and SIP is source of investment. In case of STP money is transferred usually from a debt fund and in case of SIP, it is the investor's bank account. Since it is similar to SIP, STP also helps in rupee averaging cost.

Re-balancing portfolio : An investor's portfolio should be balanced between equity and debt. STP helps in re-balancing the portfolio by reallocating investment from debt to equity or vice versa

How does STP Work ?


Imagine you won a lottery of Rs 5 Lakhs and you want to invest in equity market but at the back of the mind you are not willing to take risk to entirely bet your 5 lakh on equity.

So here you will invest Rs 5 Lakhs via STP. You will have to select a source scheme (debt scheme) and a target scheme (equity scheme) , a fixed transfer date and a fixed amount.
In below example date is 25th of every month & 5000 would be transferred from ICICI Prudential Liquid Growth (DEBT) and transferred to ICICI PRU Value Discovery Fund - Growth (Equity)
Every month Rs 5000 would be transferred from Debt Scheme to Equity Growth Scheme 

STP - Transferor Scheme : ICICI Prudential Liquid Plan - Growth
PeriodSTP Start DateTotal No. Units AccumulatedTotal Amount TransferredScheme Market Value(Rs.)
01-Jan-2013 to 08-Jun-201601-Jan-131,900.87205,000.00431,964.74
NAV DateNAVUnitsCash FlowAmountSTCG/LTGC
01-Jan-13169.912,942.77-500,000.00500,000.00
27-Jan-13170.932,913.525,000.00495,000.00STCG
25-Feb-13172.062,884.465,000.00490,000.00STCG
25-Mar-13173.192,855.595,000.00485,000.00STCG
25-Apr-13174.572,826.955,000.00480,000.00STCG
26-May-13175.832,798.515,000.00475,000.00STCG
25-Jun-131772,770.265,000.00470,000.00STCG
25-Jul-13177.782,742.145,000.00465,000.00STCG
25-Aug-13179.382,714.265,000.00460,000.00STCG
25-Sep-13181.022,686.645,000.00455,000.00STCG
25-Oct-13182.532,659.255,000.00450,000.00STCG
25-Nov-13183.992,632.085,000.00445,000.00STCG
25-Dec-13185.362,605.105,000.00440,000.00STCG
26-Jan-14186.812,578.345,000.00435,000.00STCG
25-Feb-14188.122,551.765,000.00430,000.00STCG
25-Mar-14189.442,525.365,000.00425,000.00STCG
25-Apr-14191.012,499.195,000.00420,000.00STCG
25-May-14192.412,473.205,000.00415,000.00STCG
25-Jun-14193.822,447.415,000.00410,000.00STCG
25-Jul-14195.192,421.795,000.00405,000.00STCG
25-Aug-14196.592,396.365,000.00400,000.00STCG
25-Sep-14198.032,371.115,000.00395,000.00STCG
26-Oct-14199.492,346.045,000.00390,000.00STCG
25-Nov-14200.892,321.155,000.00385,000.00STCG
25-Dec-14202.282,296.445,000.00380,000.00STCG
26-Jan-15203.782,271.905,000.00375,000.00STCG
25-Feb-15205.172,247.535,000.00370,000.00STCG
25-Mar-15206.512,223.325,000.00365,000.00STCG
26-Apr-15208.142,199.305,000.00360,000.00STCG
25-May-15209.522,175.435,000.00355,000.00STCG
25-Jun-15210.972,151.735,000.00350,000.00STCG
26-Jul-15212.392,128.195,000.00345,000.00STCG
25-Aug-15213.752,104.805,000.00340,000.00STCG
27-Sep-15215.22,081.565,000.00335,000.00STCG
25-Oct-15216.482,058.475,000.00330,000.00STCG
25-Nov-15217.842,035.525,000.00325,000.00STCG
27-Dec-15219.262,012.715,000.00320,000.00STCG
25-Jan-16220.561,990.045,000.00315,000.00LTCG
25-Feb-16221.971,967.525,000.00310,000.00LTCG
27-Mar-16223.51,945.145,000.00305,000.00LTCG
25-Apr-16225.121,922.935,000.00300,000.00LTCG
25-May-16226.581,900.875,000.00295,000.00LTCG
08-Jun-16227.251,900.87431,964.74295,000.00

From the above table we can identify that, With a lump sum investment of Rs 5 Lakhs in debt fund , even after transfer of 295000 (41 Months x 5000) , your value in debt fund is Rs 431964.74 which is approximate 8.88% return


In case if you withdraw money from liquid funds before 36 months from date of investments then short term capital gain (STCG) is levied else long term capital gain tax is levied (LTCG) and because of this reason it is been mentioned STCG & LTCG in the above example 

Let us see the value of equity growth fund now for which we transferred 5000 every month from debt fund.

STP - Transferee Scheme : ICICI Prudential Value Discovery Fund - Growth
PeriodSTP Start DateTotal No. Units AccumulatedTotal Amount InvestedScheme Market Value(Rs.)
01-Jan-2013 to 08-Jun-201601-Jan-132,593.17205,000.00301,896.92
NAV DateNAVUnitsCash FlowAmount
25-Jan-1358.1286.03-5,000.005,000.00
25-Feb-1355.31176.43-5,000.0010,000.00
25-Mar-1352.85271.04-5,000.0015,000.00
25-Apr-1354.94362.04-5,000.0020,000.00
24-May-1354.17454.35-5,000.0025,000.00
25-Jun-1349.97554.41-5,000.0030,000.00
25-Jul-1350.76652.91-5,000.0035,000.00
23-Aug-1349.28754.37-5,000.0040,000.00
25-Sep-1352.99848.73-5,000.0045,000.00
25-Oct-1355.85938.25-5,000.0050,000.00
25-Nov-1358.231,024.12-5,000.0055,000.00
24-Dec-1361.591,105.30-5,000.0060,000.00
24-Jan-1460.261,188.28-5,000.0065,000.00
25-Feb-1461.931,269.01-5,000.0070,000.00
25-Mar-1466.221,344.52-5,000.0075,000.00
25-Apr-1471.661,414.29-5,000.0080,000.00
23-May-1484.581,473.41-5,000.0085,000.00
25-Jun-1489.111,529.52-5,000.0090,000.00
25-Jul-1491.931,583.91-5,000.0095,000.00
25-Aug-1496.651,635.64-5,000.00100,000.00
25-Sep-1497.861,686.73-5,000.00105,000.00
22-Oct-1499.931,736.77-5,000.00110,000.00
25-Nov-14105.391,784.21-5,000.00115,000.00
24-Dec-14105.061,831.80-5,000.00120,000.00
23-Jan-15113.621,875.81-5,000.00125,000.00
25-Feb-15114.721,919.39-5,000.00130,000.00
25-Mar-15114.31,963.14-5,000.00135,000.00
24-Apr-15111.282,008.07-5,000.00140,000.00
25-May-15114.892,051.59-5,000.00145,000.00
25-Jun-15114.752,095.16-5,000.00150,000.00
24-Jul-15117.072,137.87-5,000.00155,000.00
25-Aug-15111.712,182.63-5,000.00160,000.00
24-Sep-15111.362,227.53-5,000.00165,000.00
23-Oct-15115.172,270.94-5,000.00170,000.00
24-Nov-15114.082,314.77-5,000.00175,000.00
24-Dec-15113.032,359.01-5,000.00180,000.00
25-Jan-16105.522,406.39-5,000.00185,000.00
25-Feb-1697.52,457.68-5,000.00190,000.00
23-Mar-16108.332,503.83-5,000.00195,000.00
25-Apr-16112.862,548.13-5,000.00200,000.00
25-May-16111.022,593.17-5,000.00205,000.00
08-Jun-16116.422,593.17301,896.92205,000.00

In Equity Fund your amount invested for Rs 205000 is now Rs 301896.92 which is approximate 23.87 returns 

Your Investment value on 5 lakhs is as on debt fund value + equity fund value i.e 431964 + 301896 = 733,860 in 41 months

Can you see the benefits of systematic transfer plan which offers consistent return , re balancing your portfolio and rupee averaging cost.

Be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via SIP in best 3 equity mutual funds in India for Retirement

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