2nd S..Systematic Transfer Plan

Most of the people wants to invest lump sum amount in mutual funds (Like Bonus, Arrears in salary, or any other income received from other sources..)but they are scared to put all of it in one go because the markets are at an all-time high.so to reduce the risk involved in investing there is 1 method or strategy which is known as Systematic Transfer Plan .So Let’s see

What is STP?

STP is a variant of SIP. STP is essentially transferring investment from one asset or asset type into another asset or asset type. In STP, a fund house allows investors to invest a lump sum amount in 0ne scheme (Debt Mf) and transfer regularly a pre-defined amount into another scheme.(Equity or Balance Mf) The transfer happens gradually over a period.

How STP Works?

Suppose you want to invest 1 Lakh in Equity Mf. Your 1st step will be

  • Choose the liquid or ultra-short term mutual fund.(If its other debt fund make sure there is no exit load )
  • Choose the Equity or Balance Mutual Fund which you want to transfer money.
  • Decide the amount to be transferred and frequency of the transfer (Daily, weekly ,monthly or quarterly )

For example you can decide to transfer 10000 every month on 10th of every month for 10 months or if 5000 than 20 months.

Benefits of STP

  • STP helps to keep a balance of Risk & Returns
  • Money invested in liquid fund earns interest till the time it is transferred to equity fund. The returns of liquid fund is usually higher than saving bank account.
  • Your money is invested in liquid fund this mean you can sell it at any time if you want. Hence it works like a Emergency Fund.
  • Since it is similar to Systematic Investment Plan (SIP),STP also helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price.

Types Of STP

Fixed STP: – In Fixed STP, amount of transfer (from one mutual fund to other) is fixed.

Flexi STP: – Under Flexi STP amount of transfer is variable. The fixed amount will be minimum amount and variable amount depends on volatility in market. For E.g If Nav of the fund decrease you can invest more amount and if NAV of the fund increase you can invest less amount.

Capital Appreciation:-Under this type, the investor takes the profit part out of one investment and invest in other.

Key Points to remember.

  • Typically, a minimum of 6 such transfers are to be agreed n by investors in STP.
  • STP attracts short term capital gain tax because every transfer is considered as redemption in the liquid mutual fund. If debt funds are sold before 3 years, the gains are treated as short term capital gains and taxed according to income tax slab applicable to investor.
  • You can bring down tax liability marginally by opting for the dividend reinvestment option in the liquid mutual fund. Dividends are tax free for investors but mutual fund pay a dividend distribution tax of 28.84% on dividend declared.
  • If you want to invest in ELSS schemes and have lump sum money ,better put it in a liquid mutual fund and do


Next Article will be on 3rd S…Systematic Withdrawal Plan (SWP)