BAJAJ BROKING
February 07, 2025
7 mins read
Think of the Systematic Transfer Plan or STP as an automatic way to switch your investment from one scheme to another regularly. This helps an investor take advantage of higher returns when the market moves in their favour. As a result, STP protects the trader’s investments from market swings, while minimising potential losses. One of the biggest benefits of the STP is that the entirety of the process is extremely simple to understand. Here’s a look at everything you need to know about what an STP is.
As already explained, an STP in Mutual Funds helps investors shift their invested capital from one fund to another. However, this can only be done between the funds that are operated by a single AMC or asset management company. Shifting one’s investment between funds managed by different agencies is not possible.
There are quite a few benefits that a systematic transfer plan in Mutual Funds offers which makes it an attractive offer for investors with varying risk appetites. Here is a look at some of the benefits:
Higher Returns
By reallocation of funds to more profitable schemes, STPs help investors earn higher returns during market fluctuations.
With such a relocation, investors can make the best of the market movements, thus maximizing profits via well-timed purchase and sale of securities.
Stability
When the market is going through a volatile phase, transferring one’s funds to a safer investment option helps them attain stability.
Since STPs let you invest in slightly volatile equities, they also let you invest in securities like Debt funds which offer stability to the overall portfolio.
Rupee Cost Averaging
Since through STPs investors can implement rupee cost averaging, the average cost of investments goes down.
Through this method, investors purchase funds when prices are low and sell them when their market value increases.
Optimal Balance
With the help of the best systematic transfer plans, investors can create a balanced portfolio.
This can be done by combining equity and debt instruments to maintain a balance between returns and risks.
This is because debt securities offer less risks while equity works well for traders who want to take more risks.
Tax Implications
If capital gains are produced after each transfer with STP, they are subject to tax deductions.
If investments are redeemed within three years, short-term capital gains of 15% are taxed.
Post this long-term capital gains apply at an investor’s annual income’s applicable rate.
To know more about STPs, it is important to know their different types. There are three main types of STPs. Here is a look at them.
Flexible STP
This type of STP works exactly like it sounds.
Investors under this scheme can decide how much to transfer and when based on their financial goals.
Fixed STP
For investors who appreciate a steady approach the fixed STP is ideal.
Under this scheme, a fixed amount is fixed that gets transferred from one mutual fund to another.
This amount is not subject to change at any point in time.
Capital STP
The third type of STP is the Capital STP.
Under this STP, the gains made via market appreciation are transferred from one fund to another if and when the latter holds the potential for higher growth.
With the help of a systematic transfer plan or STP, investors and traders can regularly move a specific amount from one mutual fund scheme to another. However, it is important to carry this out in the same mutual fund house. The main aim of the STP is to help investors shift their investments easily to reach their financial goals.
The process of starting and setting up an SIP is a two-pronged approach. Here’s a look at them:
Offline Mode:
When wanting to open an STP offline, you will first need to fill out a Systematic Transfer Plan form.
This form will then need to be physically submitted at the relevant mutual fund house.
Online Mode:
You can also set up an STP scheme with a stockbroker of your choosing as most of them offer this service online.
Here’s a look at what the tax treatment for STP looks like depending on the holding period of the funds.
Source | Holding Period | Gain Type | Taxability |
Equity | Less than 1 year | Short-Term Capital Gain | 15% |
Equity | 1 year or more | Long-Term Capital Gain | 10% without indexation benefits where an exemption exists for up to 1 lakh |
Others (like gold or debt funds) | Less than 3 years | Short-Term Capital Gain | Dependent on the investor’s tax slab |
Others (like gold or debt funds) | 3 years or more | Long-Term Capital Gain | 20% with indexation |
There is no doubt that a Systematic Transfer Plan makes for a great way for investors who are looking to utilize their funds to produce higher returns while managing risk. Here are a few instances that read ideal for anyone who wants to invest in STPs
Utilization of resources to produce higher returns:
STPs make for a great option for investors who have limited capital but want to make the best use of it.
STPs let investors invest their capital gradually, so a lumpsum amount is not needed to begin your STP.
Deal better with market ups and downs:
With the help of an STP, investors can safely move their funds into safer debt securities.
This is especially helpful when times are uncertain and the market is particularly volatile.
Invest smart and safe:
STPs maintain a balance between offering stability and managing risks.
Where on the one hand, equities hold the potential to produce higher returns with a little risk, safer options debt funds can also be combined with them in an STP.
Long-term benefits:
For investors who are in it for the long haul, STPs can prove to be quite beneficial.
STPs can help investors gain from potential stock market growth and also help them move to safer grounds if the need arises.
Diversified portfolio:
If you are looking to invest in a diversified portfolio, the STPs can be a good option to invest in.
Within an STP, you can spread your investments out between equities and debt.
This helps reduce risk while keeping the portfolio well-rounded.
Goal-oriented:
If you are someone who is saving for your dream home or your child’s education, STP can be a good investment.
With STP, you are essentially systematically transferring funds which helps you stay true to your financial goal.
If you are someone who is looking to opt for an STP, here are a few things you should keep in mind before you do.
An STP works well if you are looking for a long-term investment option and this i why expecting it to produce immediate returns from the get-go might not work. Patience is key with an STP investment.
Investors who have a good understanding of market trends and patterns will help you make the most of your investments.
Factor in the tax deductions when you calculate your expected returns as how your principal amount is utilized depends on the mutual funds you’ve chosen.
It is important to remember that though STPs might help reduce market risk, they don’t eliminate it. Staying cautious and alert will help.
Listed below are some of the main differences between SIP and STP:
Aspect | SIP | STP |
Nature | The plan involves making periodic deposits regularly. | The plan involves the transfer of funds from one mutual fund to another |
Process | Investors can invest a fixed amount in mutual funds regularly. | Enables investors to transfer funds from one mutual fund to another periodically, within the same fund house |
Taxability | No Taxes on the regularly invested amount. Taxation applies to capital gains when they are redeemed | Each transfer is taxed |
To summarize, STPs in mutual funds make for a smart and flexible way to plan your investments. They help you balance risk, and maximize returns while you try to achieve any specific financial goals you might have. Since STPs allow regular transfers between funds, they help investors stay disciplined even as they are trying to adapt to the ups and downs in the market. It is however exceptionally important to consider all factors before investing in STPs to help you make the best of the plan.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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With a systematic transfer plan, investors can manage market volatility easily as it helps them spread their investments out over time instead of making a lump-sum investment. Funds can be gradually transferred from one mutual fund to another thus reducing the risk of dealing in the market during high volatility.
The choice here is dependent on an investor’s financial goals. This is why it is important to analyze both these plans accordingly and selecting the one that works the best for the investor’s goals.
Depending on an investor’s need and financial goals, a systematic transfer plan can prove to be profitable for an investor.
STP stands for Systematic Transfer Plan.
Investing in an STP provides investors with the potential to generate higher returns, offers stability, provides balance in one’s investment portfolio and reduces tax liabilities.
For investors who are in it for the long haul, STPs can prove to be quite beneficial. STPs can help investors gain from potential stock market growth and also help them move to safer grounds if the need arises.
To start an STP, the minimum amount required varies according to the mutual fund house. However, in general, the minimum amount starts from ₹12,000/-
If capital gains are produced after each transfer with STP, they are subject to tax deductions. If investments are redeemed within three years, short-term capital gains of 15% are taxed. Post this long-term capital gains apply at an investor’s annual income’s applicable rate.
The main aim of the STP is to help investors shift their investments easily to reach their financial goals. Hence, through the systematic transfer plan or STP, investors and traders can regularly move a specific amount from one mutual fund scheme to another. However, it is important to carry this out in the same mutual fund house.
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