STP: SYSTEMATIC TRANSFER PLAN

 Published By:- 

Anand (B.Tech, M.Tech, MBA Finance) 

Mob :- 9415283904

SYSTEMATIC TRANSFER PLAN: Investment Strategy Explained

1.    A Systematic Transfer Plan (STP) is an investment strategy that allows investors to transfer a fixed amount of money periodically from one mutual fund scheme to another within the same mutual fund house. It is a disciplined approach that enables investors to reallocate their investment portfolio based on their investment goals, risk tolerance, and market conditions.

Here's how a Systematic Transfer Plan works:

2.  Choosing the Funds: 

The investor selects two mutual fund schemes from the same fund house: the source scheme and the target scheme. The source scheme is the fund from which the investor transfers funds, while the target scheme is the fund where the money is transferred.

3.   Transfer Frequency and Amount: 

The investor decides the transfer frequency (monthly, quarterly, etc.) and the transfer amount. The transfer can be a fixed sum or a fixed number of units. For example, an investor may choose to transfer Rs500 every month from the source scheme to the target scheme.

4.    Initial Investment: 

The investor needs to make an initial investment in the source scheme. This amount can vary depending on the fund house's requirements.

5.   Transfer Options: 

There are two types of STP options:

(a)  Capital Appreciation Option: 

Under this option, the appreciation in the value of units in the source scheme is transferred to the target scheme. The investor's capital remains invested in the source scheme, and only the profits are transferred.

(b)Appreciation and Redemption Option: 

With this option, both the appreciation and redemption proceeds from the source scheme are transferred to the target scheme. Here, the investor's capital is gradually moved from the source scheme to the target scheme.

(6)  Execution: 

The STP is executed by the fund house based on the investor's instructions. The predetermined transfer amount is deducted from the source scheme, and units are purchased in the target scheme at the prevailing Net Asset Value (NAV) of that day.

 

7.  Benefits of Systematic Transfer Plan:

Rupee Cost Averaging: 

STP helps investors implement the rupee cost averaging strategy. By transferring a fixed amount at regular intervals, investors buy more units when prices are lower and fewer units when prices are higher. This reduces the impact of market volatility and potentially improves returns over the long term.

Asset Allocation: 

STP allows investors to gradually rebalance their investment portfolio. They can shift funds from equity-oriented schemes to debt-oriented schemes or vice versa based on market conditions or their investment objectives. This flexibility helps in diversifying the portfolio and managing risk.

Systematic Investing: 

STP instills discipline in investors by encouraging regular and consistent investments. It eliminates the need for timing the market and reduces the impact of emotional decision-making.

Tax Efficiency: 

If the transfer is between two schemes of the same fund house, it is treated as a switch rather than a redemption and purchase. This can potentially provide tax advantages compared to selling and repurchasing units.

8.   It's important to note that while STP can be a useful investment strategy, when the stock market is at its peak. The funds that have gained substantial profit should be shifted to Debt funds in order to preserve the profits accrued. 

9.  Investors should carefully evaluate their investment objectives, risk tolerance, and consult with a financial advisor before implementing an STP or any investment strategy.

TER comparison of mutual funds and advantages of investing through a Advisor

 Published By:- 

Anand (B.Tech, M.Tech, MBA Finance) 

Mob :- 9415283904

TER Comparison of Mutual Funds and Advantages of Investing through a Advisor

1.  TER (Total Expense Ratio) is a measure of the total cost of managing a mutual fund. It includes various expenses such as management fees, administration expenses, marketing and distribution expenses, etc. The difference between TER of direct and regular mutual funds is mainly due to the commissions paid to intermediaries such as brokers or distributors in the case of regular funds.

2.     Direct mutual funds are those where investors invest directly with the fund house without the involvement of intermediaries. On the other hand, regular mutual funds are those where investors invest through intermediaries such as brokers or distributors.

3.  The TER of direct mutual funds is generally lower than that of regular mutual funds due to the absence of intermediary commissions. Let's take an example to illustrate this difference over a period of 5 years.

4.   Suppose there are two mutual funds with the following characteristics:

Fund A is a regular mutual fund with a TER of 2%

Fund B is a direct mutual fund with a TER of 1.5%

Let's assume an investment of Rs. 1 lakh in each of these funds for a period of 5 years with an annual return of 10%.

For Fund A:

Investment = Rs. 1,00,000

TER = 2%

Annual return = 10%

After 5 years, the value of the investment would be = Rs. 1,61,051

For Fund B:

Investment = Rs. 1,00,000

TER = 1.5%

Annual return = 10%

After 5 years, the value of the investment would be = Rs. 1,67,290

5.   As we can see, even though the difference in TER between Fund A and Fund B is only 0.5%, the difference in the final value of the investment after 5 is not significant and is seen that it is not more than 1%. It is also seen that individual investing on their own in direct funds without any advice, happen to get into non performing funds which overall affects their combined fund performance.

6.   Therefore, investors can benefit by investing in direct mutual funds as they offer lower expenses, resulting in higher returns over the long term. However, it is important to note that investing through intermediaries can have its own benefits such as convenience and advice, and investors should weigh these factors before making an investment decision.

Benefits of Advisor

7.  While investing in mutual funds, investors can choose to invest directly with the fund house or through intermediaries such as advisors or distributors. While direct investing in mutual funds can be cost-effective, intermediaries can provide a range of benefits to investors, such as:

8.  Expert advice: 

Advisors or distributors can provide expert advice and recommendations to investors, based on their investment goals, risk profile, and market conditions. This can help investors make informed investment decisions and select the most suitable mutual funds for their portfolio.

9.  Convenience: 

Advisors or distributors can make the investment process more convenient for investors by handling the paperwork, documentation, and other formalities on their behalf. This can save time and effort for investors and ensure a smooth investment experience.

10. Regular monitoring and rebalancing:

 Advisors or distributors can monitor the performance of the mutual fund portfolio and rebalance it regularly, based on the changing market conditions and investor's requirements. This can help investors maintain a well-diversified portfolio and maximize returns.

11. Access to new fund offerings:

 Advisors or distributors can provide access to new mutual fund offerings and investment opportunities that may not be available to direct investors. This can help investors diversify their portfolio and take advantage of new market trends.

12. Tax planning: 

Advisors or distributors can provide tax planning advice and guidance to investors, helping them optimize their tax liabilities and maximize their after-tax returns.

13.   In summary, while direct investing in mutual funds can be cost-effective, intermediaries such as advisors or distributors can provide a range of benefits to investors, including expert advice, convenience, regular monitoring and rebalancing, access to new fund offerings, and tax planning. Investors should weigh the costs and benefits of investing through intermediaries and choose the option that best suits their needs and investment goals.