Rising stock markets lead to innovations from fund houses who want to capture the imagination of the investors by offering them products that would suit their needs and requirements.

One such innovation that has been around for a while is systematic transfer plan. An STP is primarily an amalgam of a debt and equity plans, where you can keep transferring funds from one plan to another, depending upon your market outlook.

An STP is basically a combination of systematic withdrawal plan and systematic investment plan. Of course, you can also put a lump sum amount at one time in one fund and then use the SWP to transfer money in small amounts.

What it does is allow you to do is play around with the same money, by initially investing in say, an SIP and say after six months (or given the minimum holding period), use an SWP to transfer from one fund to another. However, you need to remember that the funds need to be from the same asset management company. So how does an STP work?

Under the systematic transfer plan, the fixed sum of money is transferred from one scheme to the other scheme on a periodic basis. A transfer will be treated as redemption of units from the existing scheme and as an investment in units in the new scheme.

The redemption of units while transferring is done at the applicable net asset value and there is an exit load depending upon the holding period of the investment. Further transfer into another scheme is done at the applicable NAV, so an entry load is applicable in this case.

Normally fund houses offer two plans under STP. The first one is fixed systematic transfer plan, under which a fixed amount is transferred from one scheme to the other. For this plan the minimum amount required to be transferred is generally pegged at Rs 1,000.

The other one is capital appreciation transfer plan, under which the entire appreciated amount is transferred from one scheme to the other. For this plan the minimum amount required to be transferred is normally Rs 300. The scheme from which the money is transferred is called transferor scheme and the scheme into which the money is transferred is called transferee scheme.

Load structure

Generally for equity schemes, the entry load is 2.25 per cent and in case of the debt scheme it is 1 per cent (variable), and typically there is no exit load. The investor has to bear the entry load for STP in both the transferor scheme as well as the transferee scheme.

Of course, certain fund houses do not charge the entry load in the transferee scheme (for instance, Reliance [Get Quote] Mutual Fund).  Let us consider an example of an investor who has Rs 120,000 invested in fund A (debt fund). Here he has to be pay an entry load of Rs 1,200.

Now, after he holds it for the minimum period (as required by the fund) so that there is no exit load, he opts for a STP, and transfers Rs 10,000 monthly into scheme B (equity scheme). Now for STP, the investor has to bear the entry load to scheme B, that would be Rs 225 per month (per Rs 10,000).

In other words, the total cost is Rs 2,700 for the entire transfer of Rs 120,000. So the overall entry load incurred by the investor in the transferor scheme and transferee scheme is Rs 3,900 (that is, Rs 1,200 in scheme A and Rs 2,700 in scheme B).

How can one effectively use STPs?   Say the market is volatile you could invest the lumpsum in a debt scheme of a mutual fund. You could then transfer a fixed sum of money every month from the debt scheme to the equity scheme and gain the benefit of when the market appreciates.