A Systematic Transfer Plan is a facility offered by mutual fund houses that lets you move a fixed amount at regular intervals, typically monthly, from one scheme to another within the same fund house. The most common use case is parking a lump sum in a liquid fund and systematically transferring it into an equity fund.
Why an STP exists
If you receive a large lump sum, say Rs 10 lakh from a bonus, maturity or inheritance, investing it all into equity on one day exposes you to the risk of entering at a market high. An STP lets you:
- Park the Rs 10 lakh in a liquid or ultra-short fund.
- Set up a monthly transfer of, say, Rs 1 lakh into an equity fund.
- Over 10 months, the money moves from safe to growth-oriented.
The portion waiting in the liquid fund earns roughly 6-7% while it waits, rather than sitting idle in a savings account at 3-4%.
STP vs SIP
Both invest fixed amounts into equity at regular intervals. The difference is the source of money: - A SIP debits your bank account. - An STP debits another mutual fund scheme.
An STP is essentially a SIP funded by a mutual fund instead of a bank account.
| Feature | SIP | STP |
|---|---|---|
| Source of money | Bank account | Mutual fund (usually liquid/debt) |
| Interim return on waiting money | Savings account rate | Liquid/debt fund return |
| Use case | Regular income investing | Deploying a lump sum gradually |
Tax implications
Each STP transfer is a redemption from the source scheme and a fresh purchase in the target scheme. If the source is a debt fund or liquid fund, the redemption is a taxable event: - Gains on debt funds are taxed at your slab rate (post April 2023 rules). - If the source is an equity fund, short-term or long-term capital gains tax applies depending on the holding period.
This is the one downside of STPs versus SIPs. Each transfer triggers a tax calculation on the source fund's gains, which adds complexity to your tax filing.
How to set up an STP
- Invest the lump sum in a liquid or debt fund at the fund house.
- Set up an STP specifying the target equity fund, transfer amount, frequency (weekly, monthly, etc.) and duration.
- The fund house executes the transfers automatically until the source fund is exhausted or the STP is cancelled.
When an STP makes sense
- You have a windfall and want equity exposure but not all at once.
- You want the waiting money to earn more than a savings account.
- You are comfortable with the tax complexity on interim redemptions.
For regular monthly investing from salary, a plain SIP from your bank account is simpler and has no interim tax events. Use our SIP calculator to model the equity portion of your STP.