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What is Systematic Transfer Plan (STP)?

Systematic Transfer Plan is a term that not many investors are aware of. In simple terms, STP means the transfer of funds from one scheme to another. Under, a Systematic Transfer plan a lump sum amount is invested in a scheme and regularly a fixed or a variable sum is transferred into another scheme. The most common way of investing through STP is transferring money from debt fund to an equity fund.

In case of STP, the investor first invests a lump sum amount in a low risk (usually debt) mutual fund scheme and then a fixed sum is transferred regularly to a higher return (usually equity) scheme belonging to the same mutual fund family.

The easiest way to understand STP is to know that while a SIP invests money in mutual fund through your bank account, an STP does the same by investing money in the scheme from another mutual fund holding.

A prudent investor may consider an STP from a high return to a low-risk scheme when a massive run-up of the market is expected to hedge against a market collapse. STP is usually classified on the basis of the amount transferred from the source to the target scheme. If a fixed sum is transferred, then it is known as fixed STP and if the sum transferred is the profit made from the source scheme, then it is known as Capital Appreciation STP.

How to Invest in STP?

To start investing in STP, an investor should consider the below factors:

Risk profile, asset allocation and market condition.

For example: If an investor wants to invest Rs. 1 lakh in an equity fund through the way of STP, he will have to first select an ultra-short-term or a liquid fund and then decide on a fixed amount that has to be transferred on a daily, monthly, weekly or a quarterly basis.

STP Features

Minimum Investment: The minimum investment amount depends on the amount specified by AMCs. Few AMCs let an investor invest an amount as low as Rs. 12, 000.

Entry and exit load:

There is no entry load for STP. But as per a regulation by SEBI, AMCs can charge an exit load of up to 2%. Exit load is calculated on the basis of the fund type and term of the investment.

Ensures disciplined investment:

STP enables an investor to invest in mutual funds in a disciplined way by initiating the transfer of funds between two mutual fund schemes.

Tax on STP:

A transfer initiated from one fund to another is considered as a redemption and is usually taxable. STCG is applicable on money transferred from debt fund within the first 3 years of investment.

Things to Remember When Investing in STP:

  • STP happens between mutual funds belonging to the same fund house
  • STP simply means redeeming one fund to invest in another
  • Always opt for destination funds keeping your investment goals in mind

Benefits of Investing in STP

Here are a few benefits of investing in STP

Get higher returns:

Investing in STP through mutual funds yields you higher returns as investing a lump sum amount in debt funds gives you 9-10% returns than 6-7% returns offered by the savings account.

Earns study returns:

The amount earned in source fund generates interest until the entire sum is transferred in another mutual fund scheme.

The benefit of rupee cost averaging:

STPs average out the expense ratio of the fund by buying lesser units at higher NAV and more units at lower NAV. As the money gets transferred from one fund to another, additional units are purchased systematically and the rupee-cost averaging is given to the investor.

STP re-balances the portfolio

STP helps you rebalance your investment portfolio by moving out your investments from debt to equity funds or vice versa.

20 Years STP Returns Calculator