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Investors can earn 8 - 9% returns from a liquid fund, maybe more than from a savings bank account, and also invest in an equity fund over a period

Systematic transfer plans (STPs) are enjoying a second lease of life these days. Many investment experts are asking their clients to use STP route to invest in stocks.

STP, just like SIP, its better known cousin, helps investors transfer lump sum amount to equities over a period of time. The only difference: you transfer money from a bank account in SIP transactions whereas the money is parked in a debt fund in the case of STP.

Individual investors should take STP route to enjoy the twin benefits — earn around 8-9% returns from the money parked in liquid fund and systematically invest the money in a equity fund over a period of time. The investors earn more in a liquid fund than what they get in a saving bank account.

Most saving bank accounts offer 4% rate of interest.

According to Value Research, liquid funds offered 8.77% returns in last one year. Put simply, the idle money which is to be invested in equity fund is put to better use when parked in liquid funds.

For the beginners, to initiate an STP, investor parks his money in a liquid fund or an ultra short-term bond fund with no exit load. Such funds invest in debt instruments such as certificate of deposits, commercial papers and other shortterm instruments, which do not carry much interest rate risk and offer investors money market returns. Investor then instructs the fund house to transfer a stipulated sum from the liquid fund to a particular equity fund at a pre-determined interval. All one has to do is to fill up STP form. Fund houses allow daily, weekly, monthly and quarterly transfer of money from one fund to another. It works the best if an investor with lump sum money is keen to invest in equities in a staggered manner.

The investor has to decide the target amount that he intends to invest in equities and the time frame before starting an STP. For example, if an investor is keen to invest . 10 lakh over 250 business days, he can instruct the fund house to transfer . 4,000 per day for 250 business days.

Investors need not park all the money, quantified by target amount on the day one of STP. For example, the investor in the above example can start his STP with an initial investment of less than Rs 10 lakh, say, Rs 2 lakh. The investor can keep on adding to his liquid fund till he reaches Rs 10 lakh.

If the balance in the liquid fund goes to zero, the fund house stops the STP. In such case, investor can park some money in liquid fund and again initiate STP. The biggest advantage of STP is that there is no penal charge if the liquid fund doesn’t have any money left. However, taxation is one area investors should be careful about while going for STP.

Computation of capital gains can be a bit difficult. As the money is transferred from liquid fund, there are capital gains that need to be calculated for the taxation purpose. Some fund house to offer this facility online if you have an online investing account with them.

To minimise the tax liability, investors in up to 20% income tax bracket should be in growth option and others should be in weekly or monthly dividend option of the liquid fund.

Happy Investing!!

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

1. ICICI Prudential Tax Plan Invest Online
2. HDFC TaxSaver Invest Online
3. DSP BlackRock Tax Saver Fund Invest Online
4. Reliance Tax Saver (ELSS) Fund Invest Online
5. Birla Sun Life Tax Relief ‘96 Invest Online
6. IDFC Tax Advantage (ELSS) Fund Invest Online
7. SBI Magnum Tax Gain Scheme 1993 Invest Online
8. Sundaram Tax Saver Invest Online
9. Edelweiss ELSS Invest Online