All you need to know about Systematic Transfer Plan

STP allows you to transfer money from another scheme (source plan) to a select scheme (target plan) from time to time in the same fund house,

This way, you do not have to worry about timing the market as your investment in equity funds will depreciate over time.

STP comes in handy when you have a lump sum amount but you do not want to invest the entire money in equities in one go. You can consider investing it in liquid funds and start STP in equity funds. You will also get the benefit of rupee cost averaging, which helps in buying more units when the market is low and fewer units when the market is high.

Further, suppose, if you want to withdraw money from equity fund in a year, you can opt for STP from equity fund to debt fund.

Types of STP

STPs generally come in two forms – Fixed STP and Variable STP. In a fixed STP, a fixed amount or number of units will be transferred from the source plan to the target plan at pre-determined intervals. In case of Variable STP or Flexi STP, the amount increases or decreases depending on the market conditions.

For example, under Booster STP of ICICI Pru MF, the installment amount can vary from 0.1 times to 5 times of the base installment amount as per the equity valuation index, which is the proprietary model of the firm. If you are already enrolled in the Booster STP of ICICI Mutual Fund, do note that the fund house has recently changed the installment multiples with effect from February 28.

Some fund houses like HDFC Mutual Fund and Kotak Mutual Fund also offer capital appreciation STP, in which the profit made on investment in the source fund will be transferred to the target scheme.

These STP forms can be submitted online at the branch office of the mutual fund or at authorized collection centres. Note that not all third-party aggregators like Paytm Money may provide STP option in their app.

things to note

Each STP transfer is treated as redemption from the source fund and reinvested in the target fund. Redemption of mutual fund units from a source fund attracts capital gains tax in the hands of an investor. Withdrawals from a loan scheme prior to three years will be treated as short-term capital gains and will be taxed at your income tax slab rate. Post indexation, long-term capital gains on debt funds are taxed at the same rate of 20%. In the case of equity funds, short-term capital gains received on redemption of units before one year are taxed at the same rate of 15%, plus long-term capital gains. 1 lakh per annum attracts 10% tax.

Generally, exit loads are also applicable for withdrawals within one year of investment.

According to Vishal Dhawan, Founder and CEO, Plan Ahead Wealth Advisors, the other important point to note in case of STP is its duration. “If the target fund is a hybrid fund or a large-cap fund, investors can opt for STP for a shorter tenure (around six months); But if the fund is transferred to mid-cap or small-cap, they may choose to go for a longer period (around 12 months) due to the high volatility in this space.”

When the market is right, investors may be excited to add more to equities. According to Dhawan, “The strategic asset allocation between equity and debt should be kept in mind before going for STP.”