The Indian equity markets, despite certain worries about the U.S. Debt ceiling, elevated interest rates, bank runs in the U.S., talks of recession, geopolitical tensions, and a slower-than-expected recovery in China, among other factors, have managed to create wealth for investors. Thanks to the relatively better underlying fundamentals — whether it’s India’s GDP growth, inflation, lower unemployment data, better tax collections, successfully walking on the fiscal consolidation path, corporate earnings, and so on — that Indian equities have enthused investors.

However, the bellwether S&P BSE Sensex is currently hovering near its lifetime high (of 63,583.07 made on December 1, 2022) and therefore, while you may be exuding confidence and still very bullish; it would wise to follow a tactical approach and be thoughtful when investing money in direct equities or equity mutual funds. In this context, considering the Systematic Transfer Plan or STP in mutual funds makes strategic sense.

What is a Systematic Transfer Plan or STP?

STP (like SIP) is a mode of investing in mutual funds, wherein you gradually shift your investments from one mutual fund scheme to another within the same fund house (typically from a liquid or a debt fund into an equity fund) over a period of time, called the STP tenure (which could be 6 months, 1 year, 2 years, etc.), by making systematic transfers at a regular frequency (weekly, monthly, quarterly, etc) over the STP tenure.

The scheme from where you wish to transfer is called the source scheme or transferor and the latter is referred to as the transferee or target scheme.

STP is a useful mode and serves to be an investment strategy for both, seasoned investors and starters. It inculcates the discipline of staying invested, at the same time being strategic in the approach (for portfolio rebalancing).

When opting for STP in mutual funds, here are some factors to consider…

As a thoughtful investor, consider your…

  • Risk profile
  • Investment objective (whether capital appreciation or wealth preservation with regular income)
  • The type of financial goals being addressed
  • Time-to-goal (Short-term, Medium-term, Long-term)
  • The market conditions and sentiments

Doing so shall help in choosing the source and transferee/target scheme wisely rather than arbitrarily. It may also make sure that the STP tenure is reasonable, particularly when you are deploying money from a low-risk fund to a high-risk fund.

The various STP options available with fund houses are:

1. Fixed STP – In this one, the total amount to be transferred and the frequency remains fixed. The Investor can decide the amount and period of transfer as per his/her financial goals and time-to-goal.

2. Flexible STP – As the name suggests, here the investor has the flexibility to transfer funds flexibly as deemed fit. Depending upon the market volatility, one could flexibly transfer a higher share of the source scheme or vice versa.

For example, now since the Indian equity markets are near their lifetime high and valuations are a bit expensive (and the margin of safety is narrow), to mitigate the risk involved, first a lump sum could be transferred to a Liquid Fund and from it, smaller systematic variable transfers may be made into some of the worthy and suitable equity mutual funds. This could enable handling volatility with the rupee-cost average facilitated by STP (as by making systematic transfers to the equity fund the risk is reduced vis-a-vis investing a lump sum).

But going forward, if the markets move sideways, the rupee-cost averaging feature of STP may not drive many benefits. If the market corrects significantly for any reason, then it may make sense to transfer more from the Liquid Fund.

3. Capital Appreciation STP – Here, only the capital appreciation amount or gains are transferred to another fund of your choice. The capital in the source scheme remains intact. Investors wanting to withdraw and transfer only the capital from the source scheme to another scheme (the transferee scheme) this a meaningful option. This particularly makes sense to transfer/switch the capital appreciation from an equity mutual fund to a Liquid Fund (or any other suitable debt fund) to preserve the wealth generated.

4. Swing STP – Under this type of STP option, the investor is allowed to pre-set the exposure in the respective schemes based on the target market value. The transfer/swing takes place based on the target market value set, which could be more or less than the investment meant to be in the target scheme on the respective transfer date. The funds are transferred/swung between the schemes based on the actual market value and intended investment value. The objective here is to maintain the target market value in the respective funds. For example, if the market value of the equity fund is greater than what is meant to be (from an asset allocation standpoint), a transfer takes place to a Liquid (called a reverse transfer) and vice versa.

The key benefits of STP are as under:

STP particularly helps tactically move from one category of fund (debt or equity) to another, which helps spread your investment risk.

Note, debt funds are ideal for wealth preservation, while equity funds are suitable for investors looking for capital appreciation. Investors should ideally make it a point to invest as per their asset allocation.

STPs from one type of mutual fund scheme to another, serve the purpose of portfolio rebalancing, maintain asset allocation, and helps achieve the investment objective by staying invested.

Before opting in, consider using the STP Calculator

Using the STP calculator provides insight as to how the money would be transferred to another scheme within the fund house, and how the equity fund portion and the debt/liquid portion will grow.

All you got to do is enter the investible amount, the STP tenure, and expected growth from the Equity Fund and the Liquid Fund prudently to get the answer in a few seconds.

Based on the return expectation you enter in the online calculator, it gives you the return you can make from the Liquid Fund, and the Equity Fund, and tells you indicatively the future value of your investment.

Use PersonalFN’s STP Calculator here.

The tax implications of STP

STP is considered as an exit or redemption (from the source scheme) to simultaneously purchase units in the transferee/target scheme.

Hence, the capital earned out of the units of the source scheme at the time of transfer will be subject to Short Term Capital Gains (STCG) or Long Term Capital Gain (LTCG) tax as the case may be, i.e. depending on the holding period and type scheme type (equity-oriented or debt-oriented).

Equity-oriented Mutual Fund Scheme Debt-oriented Mutual Fund Scheme
Redemption < 12 months STCG tax at 15% Taxed as per one’s tax slab (at the marginal rate of taxation)
Redemption ≥ 12 months LTCG tax at 10% for gains over Rs 1 lac in a financial year


What is the difference between STP and SIP?

Under STP, the amount invested in one mutual fund scheme (known as the source scheme) is transferred to another scheme (known as the transferee/target scheme) of the same fund house. Thus, STP allows the investor to stay invested at all times but tactically shift money from one type of scheme to another. It is particularly useful when there is windfall income, the markets are near a high, and you do not wish to deploy all the investible surplus at one go.

Whereas in the case of SIP, the investors deploy a fresh sum of money systematically at regular intervals –weekly, monthly, quarterly, etc.–into the mutual fund scheme of your choice; there is no inter-fund transfer. That being said, both SIP and STP enable rupee-cost averaging in the endeavour to compound wealth.

What is the minimum amount for STP?

According to SEBI regulations, there is no minimum investment requirement for STP in mutual funds. However, most fund houses insist on a minimum investment amount in the source scheme to start an STP. Investors must commit at least 6 transfers from the transferor scheme to the transferee/target scheme while applying for the STP transaction.

How to start or set up an STP?

Starting an STP can be done offline by reaching out to your mutual fund distributor or the relationship manager at the fund house. You need to physically fill up the hardcopy of the STP enrolment form [indicating the source scheme name, the transferee/target scheme name, the STP variant name, the amount to be transferred (in case of fixed STP), the period of STP and the frequency] when doing it offline. Alternatively, an STP can also be set up online on the website of the fund house or a fintech mutual fund investment platform.

Are Systematic Transfers to another scheme within the fund house free?

No. Your redemptions from the source scheme for transfer to another within the fund house may be subject to the exit load as applicable plus the tax implications. Besides, there are expense ratios applicable to the source scheme and transferee/target scheme.

When does the STP stop?

STPs may stop when the balance units in the source scheme reduce to an amount less than the minimum STP value.

Can STP be done if the units of the source scheme are pledged?

No. If the units of the source scheme are pledged, doing an STP is not possible.

Happy Investing!

This article first appeared on PersonalFN here

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