Systematic Transfer Plan (STP)

Now almost every investor is familiar with Systematic Investment Plan (SIP). But what about Systematic Transfer Plans or STPs? Unlike SIP, Systematic Transfer Plan may not be a term many investors are aware of. While SIP is the transfer of funds from savings to a mutual fund plan, STP means transferring funds from one mutual fund to another.

STP is a smart strategy to stagger your investment over a specific term to reduce risks and balance returns. For instance, if you invest ‘systematically’ in equities, you can earn risk-free returns even during volatile market scenarios. Here, an AMC permits you to put a lump sum in one fund, and transfer a fixed amount to another scheme regularly. The former fund is called source scheme or transferor scheme, and the latter is called target scheme or destination scheme.

How to start a Systematic Transfer Plan

STP is an effective tool in mutual funds to average your investment over a specific period. To decide on whether one should do an STP or lumpsum depends on three factors – an investor’s current allocation to equities, the risk profile of investor and finally the market view.

For instance, to invest Rs. 1 lakh in an equity fund using STP, you must first select either an ultra short-term fund or a liquid fund. After that, decide on a fixed amount that you want to transfer daily, weekly, monthly or quarterly. Hence, if you choose to transfer Rs. 20,000 every three months, it will take five quarters (15 months) to complete the investment. Earlier, fund houses allowed only debt fund to equity fund transfer within the same company. Now thanks to the digital wave, you can ever transfer from an equity fund of one AMC to that of another.

Features of a Systematic Transfer Plan

a. Minimum Investment

There is no standard minimum investment amount to invest in the source fund. However, some AMCs insist on a minimum amount of Rs. 12,000 in their systematic transfer plans.

b. Entry & Exit load

To apply for an STP, you need to do at least six capital transfers from one mutual fund to another. While you are free from entry load, SEBI allows fund houses to charge exit load up to 2%. The AMC calculates exit load based on investment tenure and fund type.

c. Disciplined & Lucrative

Systematic Transfer Plan (STP) enables a disciplined and planned transfer of funds between two mutual fund schemes. In most cases, investors initiate an STP from a debt fund to an equity fund.

d. Taxation on STPs

While an STP is a good strategy, you should be aware of the tax implications and exit loads on the transfer. Every transfer from one fund to another is considered as a redemption and fresh investment. This redemption is usually taxable. The money transferred within the first 3 years from a debt fund is subject to short-term capital gains tax (STCG). But even with this tax aspect, the returns earned would be higher than those in a bank account.