Table of Contents

  1. What is STP?
  2. How STP Works — Step by Step
  3. Types of STP
  4. STP vs SIP
  5. Classic STP Use Case
  6. Tax on STP
  7. How to Set Up STP
  8. FAQs

A Systematic Transfer Plan (STP) is a mutual fund feature that automatically transfers a fixed amount from one mutual fund (the source fund) to another mutual fund (the target fund) at regular intervals — daily, weekly, or monthly. Both funds must belong to the same AMC. STP is the smartest way to deploy a lump sum into equity without timing the market.

💡 Why STP beats lump sum investing: Instead of investing ₹10 lakhs directly into an equity fund and risking a bad entry point, park it in a liquid fund earning 6–7% and set up an STP of ₹50,000/month into equity. Your money earns returns while waiting and you average out your equity entry price.

What is an STP in Mutual Funds?

STP (Systematic Transfer Plan) moves your money from one mutual fund scheme to another of the same AMC at scheduled intervals. The most common use is transferring from a liquid or ultra-short duration debt fund (source) to an equity fund (target) — allowing you to deploy a lump sum into equity gradually rather than all at once.

STP is the institutional-grade version of a SIP — but instead of funding your equity investment from a bank account, you fund it from a mutual fund that is simultaneously earning 6–7% on your parked capital.

How STP Works — Step by Step

  1. You receive ₹12,00,000 (bonus, inheritance, property sale)
  2. Invest the full amount in a liquid fund or ultra-short duration debt fund (same AMC as your target equity fund)
  3. Set up an STP of ₹1,00,000/month from the liquid fund to your chosen equity fund
  4. Each month, ₹1,00,000 worth of liquid fund units are redeemed at current NAV and the proceeds used to buy equity fund units
  5. The remaining liquid fund balance continues earning 6–7% annually
  6. After 12 months, your entire corpus is invested in equity — with rupee cost averaging across 12 different market levels

Types of STP

STP Type How It Works Best For
Fixed STP Fixed amount transferred every interval Most investors — simple and predictable
Capital Appreciation STP Only gains from source fund are transferred; principal preserved Conservative investors who want capital protection
Flexi STP Variable amount based on market valuation (more when markets are down) Advanced investors with market monitoring

STP vs SIP — Key Differences

Feature STP SIP
Funding Source Another mutual fund (source fund) Your bank account
Idle Money Earns Yes — source fund earns 6–7% No — sitting in savings account at 3–4%
Best For Deploying a lump sum gradually Regular monthly savings from salary
Tax on Each Transfer Yes — redemption from source fund triggers capital gains No tax on investment
AMC Restriction Source and target must be same AMC Any AMC or platform
Cross-Platform Not possible Fully possible

3 Classic STP Use Cases

1. Bonus Deployment

Annual bonus of ₹5 lakhs → park in liquid fund → STP ₹50,000/month over 10 months into equity fund. Earns ~3% on the waiting amount vs 0.25% in savings account, while smoothing equity entry.

2. Pre-Retirement Shift (Reverse STP)

5 years from retirement → STP from equity fund to debt fund monthly → gradually reduces equity risk as retirement nears. Classic lifecycle asset allocation strategy, automated.

3. Windfalls and Inheritances

Received a large inheritance? Never invest it all at once in equity. Park in liquid fund, deploy via 12–18 month STP. Minimises the psychological risk of investing at a market peak.

Tax on STP Transfers

Each STP transfer is a redemption from the source fund — triggering capital gains tax:

  • Liquid/Debt fund as source: Gains taxed at income slab rate (post Finance Act 2023). Gains are typically very small on short holding periods.
  • Equity fund as source (reverse STP): STCG at 15% (held <1 year) or LTCG at 10% above ₹1L (held >1 year)
  • Tax impact is usually small for standard STPs from liquid funds (money held only weeks/months, minimal gains)

📌 Using a liquid or ultra-short fund as source minimises tax impact because the holding period is short and gains are small. Avoid using equity funds as STP source unless you’ve held them 1+ year and are rebalancing intentionally.

How to Set Up STP in 5 Steps

  1. Invest your lump sum in a liquid fund from your chosen AMC (must be same AMC as target fund)
  2. Log in to the AMC website, app, or your mutual fund platform
  3. Navigate to the source fund holding → select “Start STP”
  4. Choose: target fund, transfer amount, frequency (monthly), start date, number of installments
  5. Confirm — the STP begins on your chosen date automatically

Popular AMC options for STP: Mirae Asset, HDFC, ICICI Prudential, Axis, and SBI all offer STP between their own liquid and equity funds.

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FAQs

What is the minimum amount for STP?

Most AMCs require a minimum STP installment of ₹1,000 and a minimum of 6 transfers. The minimum initial investment in the source fund is typically ₹5,000–₹10,000 depending on the AMC.

Can I cancel an STP midway?

Yes. You can pause or stop an STP at any time — the remaining balance in the source fund simply stays invested there. No penalty is charged for stopping an STP early.

Is STP better than SIP?

They serve different purposes. If you have a lump sum to deploy, STP is better than investing it all at once. But for regular monthly savings from a salary, a direct SIP is simpler and equally effective. Most investors use both: SIP from monthly income + STP to deploy occasional windfalls.

Can I do STP from one AMC’s fund to another AMC’s fund?

No. STP requires both source and target funds to be from the same AMC. For cross-AMC transfers, you’d need to manually redeem from one fund and reinvest in another — which is a taxable event and not automated.