The investor needs to select a fund from which the transfer should take place and a fund to which the transfer is taking place. Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen and the options available with the AMC.

If an investor chooses to transfer from a liquid fund to an equity fund, the lump sum is invested in a liquid or a floating short-term plan and is transferred at regular intervals to a specified equity fund. For example, if one has 50,000 to invest in equities; he can put the entire amount in a liquid plan and go for a monthly SIP of 5,000 in an equity plan through an STP.
STPs can carry Exit Loads as per the respective schemes of the AMC.

A best systematic transfer plan can be of primarily three types:

• Flexible STP
  Under this type of systematic transfer plan, the total funds to be transferred are determined by investors as and when the need arises. Depending upon market volatility and calculated predictions about the performance of a scheme, an investor may want to transfer a relatively higher share of his/her existing fund, or vice-versa.
• Fixed STP
  In case of a fixed systematic transfer plan, the total amount to be transferred from one Mutual Fund scheme to another remains fixed, as decided by the investor.
• Capital systematic transfer plans
  Capital systematic transfer plans transfer the total gains made from market appreciation of a fund to another prospective scheme with a high potential for growth.

• Lump-sum investments: An investor having lump-sum amount can park money in one fund and systematically transfer it to another scheme as per his financial goal.
• Rupee cost averaging: Since an STP is spread over a period, it tends to average out investor’s purchase price providing him the rupee cost averaging.

A Systematic Investment Plan(SIP) is a facility which allows an investor to invest a fixed amount at pre-determined intervals into a mutual fund scheme whereas a Systematic Transfer Plan(STP) is a facility which moves a fixed amount from one scheme (source scheme) to another scheme (target scheme) at pre-determined intervals. Transfer from one scheme to another scheme under this facility is subject to Exit Load as applicable.

No, an investor cannot modify his/her STP amount. He / She can start a new STP with desired amount by crating a new STP.

Many times, it is very confusing to choose between SIP and STP. Therefore, let us understand the differences between SIP vs STP.

Type of Plan

In SIP, individuals invest a fixed sum of money in a particular mutual fund scheme. The money is invested at regular intervals. Generally, investors prefer SIPs in equity funds and for a longer horizon.

In STP, lump sum money is first invested in a mutual fund scheme (usually a debt fund). This money is transferred at regular intervals in the equity scheme. Even here, the amount of transfer and tenure is predetermined. In other funds, money is transferred from one scheme to another periodically.

Investors Suitability

SIP is suitable for investors who cannot invest a lump sum amount at once in mutual funds. It is ideal for those who have a long-term investment horizon wish to invest a small sum of money regularly. Generally, SIP is chosen by investors who want to achieve a particular investment objective.

On the other hand, STP is preferable for investors who have excess idle money in their account. Also, these investors are reluctant to invest entire money at once. Therefore, investors can park their idle money in a liquid fund and transfer a small amount of money at regular intervals in equity funds,

Taxation

Tax Treatment of Systematic Transfer Plan

The factors which govern the applicable tax on a Systematic Transfer Plan are the type of fund investors are transferring from and the tenure of their holding period. This is because a Systematic Transfer Plan transfer is considered as a redemption and taxed accordingly.

In case of equity funds, the transfers that happens within a year of purchase will be taxed under the Short-Term Capital Gains Tax (STCG) at 15%. The transfers that take place after duration of 1 year, with amount more than Rs 1 lakh will be taxed under the Long-Term Capital Gains Tax (LTCG) at 10%.
In case of debt funds, transfers that happens within 3 years of purchase are taxed as per individual’s slab rate and transfers that happens after duration of 3 years are taxed at 20% post giving investors the benefit of indexation. Indexation lowers investors’ tax liability to account for inflation.

Generally, majority of the Systematic Transfer Plans are from liquid funds and thus taxed per individual’s slab rate. However, the gains or returns in such kind of funds are also around 7-8% and thus the actual tax payable from Systematic Transfer Plans is not very high. According to the First-in-First-Out system of accounting, every Systematic Transfer Plan transfer is considered as part income and part capital.

For example, suppose that an investor has invested Rs 2 lakh in a liquid fund and it has grown to Rs 2.2 lakh in 6 months. Investor starts a Systematic Transfer Plan from the 7th month onwards of Rs 20,000 per month. In this scenario, Rs 18,000 which is 90% of each transfer or Systematic Transfer Plan instalment is capital and Rs 2,000 which is 10% is capital gains or income. This income component will be taxed at investor’s slab rate. Suppose tax rate is equal to 15%. In this case, investor will have to pay a tax of Rs 300 on every Systematic Transfer Plan installment.

In SIPs, no tax is applicable as there is an investment in a mutual fund. Additionally, individuals can invest in an ELSS fund (Equity Linked Saving Scheme) to claim tax deduction under Section 80C of the Income Tax Act, 1961 up to INR 1.5 lakhs.

However, in the case of STPs, taxation is involved. Here, the funds are transferred from a liquid fund to an equity fund. Therefore, each transfer is considered redemption (for the liquid fund) and attracts capital gains tax.

In case of equity funds, short term capital gains (STCG) is applicable if the redemptions happen within a year from the date of purchase. The STCG for equity funds is taxable at flat 15%. Similarly, if the funds are redeemed after one year, then long term capital gains are applicable. LTCG is chargeable at 10% if the gains above INR 1 lakh.

STCG is applicable if the funds are redeemed before three years from the date of purchase in case of debt funds. STCG is chargeable as per the individual income tax slab rate. On the other hand, LTCG is applicable if the funds are withdrawn after three years, LTCG is taxable at 20% without indexation.

Conclusion

STP is a very useful strategy to mitigate risks in the market. But it is necessary to remember that it doesn’t eliminate the possibility of losses in the market. At the same time, the minimization of risk exposure means that the investor could lose out on potential returns when the market performs exceedingly well. However, this strategy can be used to cap losses and increase portfolio returns in the long-term.