STP (Systematic Transfer Plan)
STP stands for Systematic Transfer Plan. It is a mutual fund facility that moves a fixed amount from one fund to another at regular intervals, usually from a low risk debt fund to an equity or hybrid fund.
An STP helps you shift a lump sum into the market gradually instead of investing it all at once, which can smooth out market volatility.
What is an STP in mutual funds
An STP is used when you have a lump sum but want to invest it in a phased manner. You park the money in a source fund, commonly a liquid or short duration debt fund, and set up a periodic transfer into a target fund such as equity, hybrid, or another debt scheme.
Each transfer works like a redemption from the source fund and a purchase into the target fund, based on the NAV on the transfer date.
How a Systematic Transfer Plan works
- Choose source and target: Select a fund to park the lump sum and a fund where the money will be transferred.
- Set the schedule: Pick the frequency (monthly or weekly) and transfer amount.
- Transfers happen automatically: On each date, units from the source are redeemed and invested in the target.
- Continue until completion: The plan runs for a fixed period or until the source balance is fully moved.
Types of STP
A fixed amount is transferred at each interval, creating a steady investment pace.
Only the gains earned in the source fund are transferred, keeping the principal intact.
The transfer amount can vary based on a rule or market condition, offering more flexibility.
Key benefits of STP
- Rupee cost averaging: Spreads entry into markets and reduces timing risk.
- Better cash utilization: Money earns debt fund returns while it moves to equity.
- Disciplined investing: Automates transfers and avoids emotional decisions.
- Portfolio rebalancing: Helps shift allocations gradually as goals or risk change.
STP vs SIP vs SWP
STP moves money between two mutual funds you already hold. SIP invests fresh money into a fund at intervals. SWP withdraws a fixed amount from a fund to your bank account. STP is useful for phasing a lump sum into riskier assets, while SIP builds investments from regular income and SWP creates cash flow from existing investments.
Phased market entry
STP lets you invest a lump sum in steps instead of taking a single entry risk.
Automatic discipline
Transfers happen on schedule, keeping the plan consistent through market cycles.
Risk management
It reduces timing risk by combining debt stability with gradual equity exposure.
Costs, exit loads, and tax treatment
- Exit loads: If the source fund has an exit load period, each transfer can trigger that charge.
- Tax impact: Each transfer is treated as a redemption from the source fund and taxed based on its holding period and fund type.
- Expense ratios: You pay expense ratios of both the source and target funds during the transfer period.
When is an STP useful
- Lump sum investing: You want to invest a large amount in equity but prefer staggered entry.
- Market volatility: You want to reduce the impact of short term market swings.
- Asset allocation shifts: You are moving from debt heavy to equity heavy allocations.
- Goal based investing: You want a structured path to build risk exposure as the goal nears.
Who should consider an STP
- Investors with a lump sum who want to enter equity gradually.
- People shifting money from savings or fixed income into mutual funds.
- Conservative investors who want a smoother transition into higher risk assets.
- Goal based planners who want a disciplined, rules based transfer strategy.