Savvy investors flock to STPs for higher returns

Systematic transfer plans or STPs — an investment route that allows mutual fund investors to shift a fixed sum from one scheme to another at regular intervals — are gaining popularity among affluent investors.

With heightened uncertainty over the stock market's prospects and debt schemes churning healthy returns, these investors are increasingly opting for STP to ensure they do not miss out on higher debt returns, while waiting for opportunities in equities.

Most of them are investing a lump sum in liquid schemes which, in turn, transfer a fixed amount every month to equity schemes. This is how an STP works. If an investor has Rs 1 lakh to invest, but is not comfortable with putting the entire money in the stock market, he can lock in the money in a short-term debt fund that has STP options. The investor then sets a time or event trigger on the debt scheme.

If the investor has set a time trigger —say a monthly trigger — a pre-determined portion of the investment moves out of the debt scheme into the chosen equity funds every month. An event trigger will allow the investor to put in a portion of the money every time the market falls to acertain level.

"STP gives investors the best of both worlds. It allows investors to build an equity portfolio without taking huge risk. The time the money is not invested in equities, it generates huge returns in the debt portfolio," said A Balasubramanian, chief executive officer, Birla Sun Life Asset Management.

The advantage of STP is that investors are able to pocket higher returns till such time the money is invested in equity schemes. At current rates, investors get 8.5-9.5% on their liquid fund portfolios vis-a-vis 6% on bank's fixed deposits.

"Affluent investors are opting for STPs to pocket higher short-term yields, while waiting for investment opportunities in equities market.

Apart from higher yields, investments in liquid funds get better tax treatment than bank FDs," said Srikanth Meenakshi, director, Wealth India Financial Services. Returns on liquid funds are taxed at about 14% annually, while gains from bank FDs are taxed at 30%.

Over 10% of the money flowing into systematic investment plans (SIPs) of equity schemes comes through STPs, as per industry estimates. The fund industry receives about Rs 1,800 crore though SIPs every month.

Fund houses like HDFC, Reliance Mutual, Franklin Templeton, Birla Sun Life Mutual and Tata Mutual, among others, are promoting STPs in a big way. They are giving 'daily transfer', 'event transfer' and 'weekly transfer' options to investors.

Some fund houses also give the option to transfer gains (made on liquid portfolio) into equity funds. "Fund houses are promoting STPs to attract lump sum investments from investors.

It's the easiest way to convert them into equity fund investors," said the marketing head of a bank-promoted fund house.

Source: http://articles.economictimes.indiatimes.com/2011-12-07/news/30485797_1_equity-schemes-liquid-funds-affluent-investors