3 Things To Consider Before Starting An STP

Mutual Funds in India went past the 23-lakh crore mark recently, continuing their trailblazing pace of growth. With the widespread proliferation of Mutual Fund investments that has taken place over the last three years, a number of investors are starting to use STP's (Systematic Transfer Plans) while making investments. If you've been advised to start an STP from one fund into another fund, you need to keep these three things in mind.

Purpose
It's a commonly held misconception that STP's are a 'one-way street' that can only be used to invest into equity mutual funds in a staggered manner. However, this isn't true. STP's can serve different purposes for different investors, depending upon their life stage and preferences. STP's can be used for two purposes - systematic de-risking, and systematic equity investing; and you need to be very clear on which one of these you're trying to accomplish. For instance - if you're looking to make a long-term investment into equities, but are worried about market valuations, you can invest your money into a liquid fund by the same AMC, and issue an STP instruction to the AMC instead of investing a lump sum. Conversely, you may already be invested into equity funds for many years, and sitting on a handsome profit. In such a scenario, an STP can be used to book profits in a disciplined manner - which is usually far more effective than booking all your profits on a single day.

Tax Implications
Before you start an STP, you should ideally consider the tax implications of the same. Bear in mind that from a taxation standpoint, an STP is nothing but a sale of units from one scheme, and a simultaneous purchase of units in another scheme. Mutual Funds follow a FIFO (First In, First Out) rule for partial liquidations, and so an STP out of a particular fund will involve the liquidation of units, starting from the first ones you purchased. Ideally, you'd want to minimize your tax liability by ensuring that none of the equity/ equity-oriented fund units that you bought in the past 12 months are transferred out as a result.

Tenor 
It's quite common for investors to be confused while selecting the tenor of their STP's. Should you stagger your investments in/out of equity funds over 6 months, 12 months, 24 months or 36 months? To be able to take an effective decision on this front, you'll need to have a view on the near-term direction of the equity markets. If markets have already run up significantly, and are richly valued, you should ideally shorten the duration of your STP's out of equity funds, and lengthen the tenors of your STP's into equity funds. Conversely, you should shorten your STP durations if markets have corrected heavily  and you're investing into equity funds, and increase your STP durations  in bearish markets if you're staggering out of equity funds.