What is STP in mutual funds?
A Systematic Transfer Plan (STP) allows you to move your money from one mutual fund scheme to another in regular installments within the same Asset Management Company (AMC). It works like an SIP in terms of regularity and frequency but has a key difference. While an SIP transfers money from your bank account into a mutual fund, a Systematic Transfer Plan transfers money from one mutual fund scheme to another within the same fund house (Asset Management Company, or AMC).
An STP is a good option for lump-sum investors who would rather enter the market gradually. To keep your money from sitting around, you first put it in a liquid fund or low-risk debt fund. These funds usually keep your money accessible while providing higher returns than a standard savings account. After that, you gradually move the money into equity, which helps you maintain discipline, lower timing risks, and enter the market with greater assurance.
How does an STP work?
Let’s say you got ₹1.5 lakh as your annual bonus. You want to invest it in mutual funds but are worried the market might go down soon. With an STP (Systematic Transfer Plan), you don’t have to invest it all at once. You can first put the ₹1.5 lakh in a debt fund (a safer fund), and then every month, a small amount say ₹7,500 automatically moves from the debt fund to an equity fund. This way, your money gets invested gradually, reducing risk and helping you earn steady returns while your remaining amount also keeps growing safely.
What are the key features of a Systematic Transfer Plan?
- Systematic transfers: STPs allow you to transfer your money at regular intervals, such as weekly, monthly, or quarterly, based on your preference. You also get to choose the amount to be transferred.
- Automated process: The transfers happen automatically once the STP is set up. You do not need to initiate or monitor each transaction manually.
- No entry load: Most mutual funds do not charge an entry load for STP transactions, which makes it a cost-effective way to transfer your money from one scheme to another.
Types of Systematic Transfer Plan
- Flexible systematic transfer plan: Investors decide the total amount to be transferred as and when the need emerges under this kind of systematic transfer plan. An investor may wish to transfer a comparatively larger portion of their current fund, or vice versa, depending on market volatility and estimated scheme performance forecasts.
- Fixed systematic transfer plan: When an investor chooses a fixed systematic transfer plan, the total amount that can be moved between mutual funds stays fixed.
- Capital systematic transfer plan: Plans for capital systematic transfers move all of a fund’s gains from market appreciation to a different potential scheme with significant growth potential.
- Swing systematic transfer plan: Under this type of STP option, the investor is allowed to pre-set the exposure in the respective schemes based on the target market value. The transfer/swing takes place based on the target market value set, which could be more or less than the investment meant to be in the target scheme on the respective transfer date.
Taxation for Systematic Transfer Plan.
For every installment transferred via STP, capital gains, if any, are calculated based on the difference between the NAV at the time of original investment in the source fund and the NAV at redemption (the time of transfer).
Taxation Based on Fund Type
Equity Mutual Funds:
- If units are held for less than one year before transfer, gains are taxed as Short-Term Capital Gains (STCG) at 20%.
- If held for more than one year, gains above ₹1.25 lakh in the financial year are taxed as Long-Term Capital Gains (LTCG) at 12.5% without indexation.
Debt Mutual Funds:
- If the units were bought on or after April 1, 2023, as per the current tax regulations, all gains regardless of holding period are taxed at the individual’s income tax slab rate
For investors looking to take advantage of market opportunities while successfully managing risks, a Systematic Transfer Plan (STP) can be a useful tool. You can take advantage of rupee cost averaging, diversification, and a disciplined investment approach by progressively moving your money between schemes.
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FAQs
Is STP taxable?
Yes, Systematic Transfer Plan (STP) is taxable because each transfer is treated as a redemption from the source fund and a fresh investment into the destination fund.
What is the ideal duration for an STP?
The ideal duration for a Systematic Transfer Plan (STP) is generally 6 to 12 months, though it can vary based on your goals and market conditions
Can I modify or stop my STP anytime?
An STP can start, stop anytime the investor wishes, moreover, investors can consult a good advisor with respect to the same, keeping in view of the market conditions.
Who should invest through STP?
A Systematic Transfer Plan (STP) is ideal for investors who have a lump sum of money to invest but want to mitigate the risk of investing it all at once in volatile markets.
Further read:
difference between SIP and Mutual Fund?