STP in Mutual Fund - Meaning, Features, Types, How It Works

Mutual funds are a great way to grow wealth, but not every fund remains the right fit over time. Market fluctuations might make you want to switch funds and that is when a Systematic Transfer Plan (STP) comes into the picture! It lets you gradually shift your money between funds, reducing risk and maximizing returns. Whether you're moving from debt to equity for growth or vice versa for stability, STP ensures a smooth and strategic transition.

Let’s explore what is systematic transfer plan, how it works, its features, types and much more!

What is STP in Mutual Funds? 

A Systematic Transfer Plan (STP) allows investors to move money between different mutual fund schemes regularly in the same AMC at a pre-determined interval. This is beneficial for investors who want to completely or partially transfer funds from their current fund to another new fund. Furthermore, it reduces risk and maximizes returns.

For example, suppose you had invested Rs.1,20,000 in a debt mutual fund (source fund) during a volatile market. But now, as the market improves, you want to shift to equity mutual funds (target/destination fund) for higher growth but prefer a gradual, lower-risk approach.

By setting up an STP of Rs.5,000 per month, you steadily transfer funds from debt to equity, balancing risk while capitalizing on market opportunities. Over time, your debt fund balance is transferred to your equity investment. 

Key Features of STP Every Investor Must Know

1. Minimum amount: SEBI sets no minimum investment for STP. However, most AMCs require at least an investment of Rs.12,000 in a fund to be eligible for STP. 

2. Minimum transfer: It is mandatory for investors to make at least six fund transfers to be eligible for this scheme.

3. Entry and exit load: Entry load is not applicable, but the exit load may apply based on the scheme’s structure. 

4. Taxation: STPs are subject to the same tax rules as other mutual fund investments.

Types of Systematic Transfer Plans

1. Flexible STP: Here, the investors are allowed to transfer varying amounts of money from one mutual fund scheme to another based on market conditions or personal preferences.

2. Fixed STP: In this type of STP, the investor can only transfer a fixed amount of money at regular intervals from one mutual fund scheme to another, as decided by themselves.

3. Capital Appreciation STP: It is a type of STP where the total gains of a fund, which is made from market appreciation, get transferred to another prospective scheme with a high potential for growth. 

How does an STP work?

An STP in mutual fund works in a simple way where you periodically move a specific pre-determined amount from one mutual fund scheme to another, which is run by the same Asset Management Company.

Accordingly, you have to choose your target fund, set up the frequency and amount of transfer, and set up your STP. After this, you then monitor your investments in source and target funds in order to make necessary changes when the next frequency/interval comes. 

Benefits of Systematic Transfer Plans

1. Managing your risks: Systematic Transfer Plans (STPs) provide a structured approach to managing market risk by gradually moving funds between different schemes. Here, the investors can mitigate the impact of market volatility and safeguard their investments.

2. Rupee Cost Averaging: Another major objective of this investment approach is to average out the cost per unit over time by investing a set amount of money at regular intervals, independent of market movements. Over time, this approach lowers the impact of market volatility as it averages out the purchase cost over time

3. Balanced investment: STP helps you maintain an ideal asset mix aligned with your risk appetite, financial goals, and investment horizon. By gradually transferring funds, STP allows you to diversify effectively across asset classes, ensuring a balanced portfolio that manages risk and returns simultaneously.

4. Higher Returns: STPs help you increase your investment returns by enabling you to shift from your current funds to a more profitable opportunity. This approach allows investors to capitalize on market trends, maximizing potential gains through the timely allocation of different securities.

Understanding the Potential Downside of STP

While an STP in a mutual fund is a smart investment tool, it also comes with drawback that need to be considered before starting your Systematic Transfer Plan.

One noticeable limitation of an STP is that it only allows fund transfers within the same Asset Management Company (AMC). This means you cannot transfer investments from one fund house to another, restricting flexibility in choosing the best-performing funds across different AMCs.

Suppose you invest ?5 lakh in a debt fund from AMC A and plan to shift to an equity fund after a year. Now, you have two options:

• Equity Fund from AMC A offering 12% returns

• Equity Fund from AMC B offering 15% returns

Naturally, you would prefer AMC B's equity fund for higher returns. However, since STP only allows transfers within the same AMC, you cannot directly transfer funds from AMC A to AMC B. Instead, you must redeem your debt fund from AMC A and manually invest in AMC B, making the process less seamless and potentially triggering tax implications.

Duration of STP in Mutual Funds

The duration of a Systematic Transfer Plan in Mutual Funds will depend on the frequency you choose for transferring funds from the source fund scheme to the target scheme. This offers you the flexibility to transfer your funds on a weekly, monthly, quarterly, or yearly basis, based on your investment strategy and financial goals.

1. Weekly STP: Here, the funds are transferred every week, helping the investors to have frequent market participation and better rupee cost averaging. It suits investors who want to minimize short-term market fluctuations.

2. Monthly STP: The transfer here happens once a month that balances the risk and returns of the long-term investors who are looking for gradual exposure to a high-risk market.

3. Quarterly STP: Here, the transfers occur every three months, offering a less frequent but structured approach. This works well for investors seeking moderate risk exposure while keeping funds in a low-risk asset for longer.

4. Yearly STP: It is an STP where funds are transferred once a year. It is useful for investors with a long-term outlook who want to shift funds gradually while staying invested in a stable asset for most of the year.

However, one important point that every investor should know is that it’s not possible to transfer all the money from one mutual fund scheme to another in a single transaction. If such a transfer occurs, it is referred to as a "switch."

Furthermore, the ideal duration for an STP will depend on how overvalued the market is and the investor’s risk tolerance.

1. If the market is fairly valued, i.e., if the target fund market is stable and gradual transfers over a short period are sufficient, then the ideal STP duration can be between 6 months to 1 year.

2. If the market is overvalued, i.e., if the target fund market has been rising for a long time, then 1.5 years to 2 years would be an ideal option as it is safer to spread risk.

3. If the market is highly volatile and overvalued, i.e., if the target fund market is at extreme highs or very volatile, then having an STP duration of 2+ years would be ideal. 

Scenarios Where a Systematic Transfer Plan will Help You

An STP in mutual fund is not just about shifting money between funds but it also plays a very crucial role in portfolio rebalancing, complete transfer, and systematic deployment of capital. Let us understand such scenarios where a Systematic Transfer Plan helps you in your investment journey.

Scenario 1: Portfolio Rebalancing

Portfolio rebalancing is a necessary factor to maintain the ideal mix of debt and equity, based on your financial goals and risk tolerance. Here, if the market conditions shift, STP enables you to move money from one market to another.

Suppose your target allocation is 70% equity and 30% debt, but due to a market rally, equity exposure increases to 80%. Now, you can make use o the STP feature to gradually shift that 10% from equity back to debt, rebalancing your portfolio. 

Scenario 2: Complete transfer

When the source fund has delivered its maximum potential and the market appears stagnant, investors can use STP to gradually shift their entire investment into a higher-growth target fund. This allows them to capitalize on better market conditions while avoiding sudden market timing risks.

Imagine you invested Rs.10 lakh in a debt fund during a high-interest period, earning 7-8% annual returns. As interest rates decline, future returns seem limited to you. Meanwhile, the equity market is recovering, presenting a better growth opportunity. Therefore, instead of switching the entire amount at once, you set up an STP of Rs.50,000 per month to gradually move funds into an equity fund, securing past gains while benefiting from market growth.

Scenario 3: Capital Deployment

Investors who deploy their capital in a structured way help them avoid market timing risks and optimize entry points. This means that, instead of investing a lump sum in a volatile market, STP allows the gradual dispersal of money from a debt fund.

For example, if you have Rs.10 lakh, you can first park your money in a liquid or debt fund and transfer Rs.50,000 per month to an equity fund. This phased deployment reduces the risk of investing at market peaks and benefits from rupee cost averaging.

Taxation of STP in Mutual Funds

In a Systematic Transfer Plan (STP), each transfer is considered as a redemption from the source fund and as a new investment in the target fund. However, the tax obligations for STP will vary based on mutual fund type and holding period. 

Equity Mutual Funds

A mutual fund scheme that primarily invests in equity stocks is known as an Equity Mutual Fund. As per the current SEBI mutual fund regulations in India, an equity mutual fund scheme must allocate at least 65% of its assets to stocks and equity-related securities.

Now, let us understand the tax implication of STP in equity mutual funds.

• Short-Term Capital Gain:

If the source fund of an equity mutual fund is transferred from one scheme to another within 12 months, then the gain is taxed at 15% (for transfers made before July 23, 2024), and at 20% (for transfers made on or after July 23, 2024).

• Long-Term Capital Gain:

However, if the source fund of an equity mutual fund is transferred after 12 months, then LTCG exceeding Rs.1,25,000 is taxed at 10% (for transfers made before July 23, 2024), and 12.5% (for transfers made on or after July 23, 2024) with no indexation benefit.

Debt Mutual Funds

A debt fund is a type of mutual fund scheme that makes investments in fixed-income securities that offer capital appreciation, such as government and corporate bonds, corporate debt securities, money market instruments, etc.

A debt mutual fund will be taxed as per the investor’s income tax slab rate irrespective of the holding period of the fund without the indexation benefit. However, if the debt mutual fund was purchased before April 1, 2023, and has been sold after 36 months, an LTCG tax of 20% will be applicable on the gain along with the benefit of indexation.

STP vs SIP vs SWP: A Comparative Breakdown

Below, we have a table that outlines the major differences between Systematic Transfer Plans (STPs), Systematic Investment Plans (SIPs), and Systematic Withdrawal Plans (SWPs).

Switch vs STP in Mutual Fund

A Systematic Transfer Plan (STP) allows investors to gradually shift funds from one mutual fund scheme (source fund) to another (destination fund) at pre-determined intervals in the same AMC. On the other hand, a Switch is a one-time transfer of the entire investment from one scheme to another within the same mutual fund house. 

STP is used to move funds from a low-risk debt fund to a high-growth equity fund over time, reducing exposure to market volatility. However, unlike STP, a Switch does not spread out risk and is more vulnerable to market fluctuations. 

Starting your STP Journey: A Step-by-Step Guide

To get started with your Systematic Transfer Plan journey in mutual funds, follow these simple guidelines stated below.

1. Choose a mutual fund house: If you do not have an already existing investment in any mutual fund scheme, you first have to select a reliable mutual fund house in order to start your STP journey.

2. Choose your source and target funds: Depending on your financial objectives and risk tolerance, choose your source and target scheme for your initial investment. Or if you already have a mutual fund investment, then you have to decide only on your target scheme.

3. Decide on the frequency and amount of transfers: The effectiveness of an STP depends on how much and how often you transfer your funds. You can choose weekly, monthly, or quarterly frequency and opt for fixed, flexible, or capital appreciation-based transfers.

4. Set up the STP: You can set up an STP online by logging into the mutual fund platform, and confirming the details. However, if you prefer the offline method, you can visit a mutual fund branch, fill out the STP registration form, and submit it.

5. Monitoring and adjusting your plan: Since the market conditions often keep changing,  regularly monitoring the performance of the target fund, returns on the debt funds, and market trends will help you keep your investment strategy dynamic and responsive to market conditions.

Key Points to Remember Before Starting Your STP Journey

1. Systematic Transfer Plans (STPs) are only permitted between funds within the same mutual fund house (Asset Management Company).

2. While the fund house sets the minimum investment amount, SEBI regulations require a minimum of six STP transactions.

3. The transfer of these funds must happen periodically only. You cannot transfer all your amount from one mutual fund scheme to another in one shot.

4. Some mutual funds will have an exit load if redeemed within a specified period. Check if your source fund has any such charges before starting an STP.

5. STP is one of the most reliable strategies for reducing risk. However, it cannot completely eliminate risks, and in some cases, returns may also decrease.

6. STP requires discipline. Exiting early due to market fluctuations defeats the purpose of systematic investing.

Conclusion 

A Systematic Transfer Plan (STP) is a smart way to manage investments by gradually shifting funds from a low-risk scheme to a high-growth one. By doing this, STPs enable strategic asset allocation and portfolio rebalancing, allowing investors to adapt to changing market conditions and achieve their financial goals.

However, understanding taxation is crucial, as each transfer is treated as a redemption and may attract capital gains tax. By choosing the right funds, setting an optimal transfer frequency, and keeping tax implications in mind, you can make the most of your STP.

Whether you're a beginner or an experienced investor, STP offers a structured approach to wealth creation. Now, it's time to put this knowledge into action and start your STP journey with Rupeezy!