Systematic Transfer Plan: Investment Strategy for Gig Economy

Why does Systematic Transfer Plan works best for Gig Economy? Let's find out!

Finances are a bit tricky for Freelancers/Self-employed individuals. 

Fun! But tricky.

Some months you get paid really well. Some months are not that great. And the best months are those when a big lumpsum payment comes through. Drum Roll!

Getting paid for your skills and creativity via gigs is pretty cool. Congratulations, you are running a profitable business. 

But that’s only the half battle won. The other half is managing that money.

With income coming from different streams at a variable frequency, investing each month is not reliable. SIPs are almost out of the picture. Though, investing a lumpsum amount in a single scheme is also risky. 

What get SIP-like features by investing a lumpsum amount? 

Sounds interesting? Alright, we gotta talk about this. Read along!

What is a Systematic Transfer Plan?

STP allows you to move money from one scheme to another in installments at preferable intervals. You get to enjoy the returns on both schemes.

Investors prefer STP when they have a lump sum amount to invest. 

STP is somewhat similar to SIP. While SIP deducts money from your savings account, STP deducts the amount from the source mutual fund. 

You may like to know the benefits of SIP.

How Does STP Work?

In STP, your lumpsum amount gets invested in a mutual fund of your choice, called a source fund. You can set a specific amount and the frequency at which your money will be transferred to one or more target mutual funds of your choice. 

Note- Both source and target schemes must be from the same fund house. 

At regular intervals set by you, your money will go from the source scheme to the target scheme in installments.

We would recommend liquid debt funds as your source scheme and equity mutual funds as a target scheme. Debt funds are often less volatile than equity funds. You will earn decent returns, which are higher than any saving account. And equity funds, even though slightly riskier, can deliver higher returns long-term. 

Benefits of Systematic Transfer Plan

1. Possibility of Higher Returns

You get the best of both source and target schemes with STP. 

Liquid debt funds invest in debt instruments with short-term maturity and decent returns. While your savings account will give you a 4% interest rate, debt funds may offer 6-7%. 

With a slight risk, equity funds may deliver superior returns than debt funds. Collectively, you have the possibility to earn superior returns on your lumpsum amount. 

2. Balanced Risk and Returns

Market volatility is an inevitable part of investments. Of course, there will be some risk involved.

The good news is, STPs can balance that risk and returns by shifting your money into safer investment avenues. 

When the market is not in your favor, you can shift your installments into safer equity funds such as large-cap. Or money market schemes. 

3. Rupee Cost Averaging

Similar to SIP, STPs also have rupee cost averaging. Fund managers will buy more units when the NAV is low and fewer units when NAV is high. 

When the unit prices increase even further, selling units would be more profitable. 

Tax Implications

Each transfer from a source scheme is considered a withdrawal. Investors have to pay a certain tax per transfer.

  • If the source fund is an equity scheme: You will have to pay a 15% tax for short-term capital gains (funds redeemed within a year). Long-term capital gains (funds redeemed after 1 year) will be taxed at 10% above 1 lakh. 
  • If the source funds are debt funds: The Long-term capital gains (investment held for more than 36 months) are taxed at 20% after indexation. Short-term capital gains come under your income, so you will have to pay tax as per your tax slab. 

Things to Consider Before Starting a Systematic Transfer Plan

1. Source and Target Scheme

You can choose any type of debt or equity scheme as your source and target scheme(s). Fund houses have various mutual fund schemes for you to explore.

Equity scheme targets are suitable for investors with moderate to high-risk appetites. Otherwise, you can go with safer instruments. 

Don’t forget to align your investment goals and portfolio with the schemes that you select. 

Get a complimentary portfolio analysis with us. Our advisors will help you select the right schemes.

2. The Frequency and Amount of the Transfer

Fund houses often have weekly, monthly, quarterly, and even yearly STPs. Make sure you understand all possible options before setting the frequency and the amount of transfer.

NOTE: Once you invest a lumpsum amount in the source fund, you can start STP even after 6 months or a year. The transfers can start/stop/change later on.

3. Investment Horizon

Sabr ka fal meetha hota hai!

Returns on mutual fund investment take time. We would recommend holding your investment for a longer duration. Preferably 3-5 years or more.

4. Expected Returns

Returns on mutual funds vary with market trends, fund performance, taxation, exit load, expense ratio, and more. Knowing the above parameters will help you understand the expected returns. 

Conclusion: Why Should Freelancers Invest In a Systematic Transfer Plan?

Freelancers have a wide spectrum of payment structures. Month-end salaries are not a part of the gig economy. 

Managing payments, filing taxes, and planning investments can get complex when payments vary. 

STPs make the investment part quite easier as it allows lumpsum investment followed by installments. The definition of a lumpsum amount can be different for everyone. Please know that you don’t have to have lakhs to start STP. 

Many fund houses have a lower threshold on source fund investment. You can take benefit of liquid funds as well as equity funds.

If you are still confused, feel free to reach out to our advisors. Our experts will help you plan a suitable STP with the amount that you are comfortable with. 

The earlier you invest, the better returns you will earn! 

Get more Personal Finance Tips and Mutual Fund Tips with VNN Wealth.