What is Systematic Transfer Plan (STP)?

Published On: 12-Aug-2020

A Systematic Transfer Plan (STP) is an investment option available to the investors to enable them to switch their investments from one mutual fund scheme to another. As the name suggests, the transfer between different mutual fund schemes happens systematically. One needs to specify a ‘source scheme’ and a ‘target scheme’ while making an STP registration, wherein the source scheme denotes the mutual fund scheme from where the investments will be switched, and the target scheme represents the mutual fund scheme where the investors aim to invest. 

 

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How does STP work?

STP works in the manner as mentioned below:

  1. Making Investment in Source Scheme – One needs to invest in the source scheme before registering an STP. Such investment may have been made by the investor in a lump sum or through SIP (Systematic Investment Plans). 

  2. Registering an STP – With the base investment in the source scheme, one may register a STP to switch the investments to target scheme periodically. Such a transfer mandate may be in terms of a fixed number of units or amount. 

  3. Investment in Target Scheme - The STP process is a simple redemption and fresh investment process. The mutual fund units in the source scheme are redeemed at periodic intervals, and the resultant proceeds are invested in the target scheme. STP will expire at the end of the specific tenor or when the mutual fund investments in the source scheme have been fully redeemed. 

Benefits of STP

Following are the benefits of registering an STP:

1. Switching the Mutual Fund Investments Systematically

An STP is a process of simple redemption and fresh investment. However, both the transactions happen simultaneously and happen on a periodical basis without any further action required by the investor. As such, it allows the investors to shift their investments from one mutual fund scheme to another. 

2. Aligning the Risk Profile

An STP may be registered to switch the investments from a debt scheme to an equity scheme or vice versa. Whichever direction the mutual fund investments may move, the primary objective behind registering an STP is to align the risk profile of the investor with that of the investment portfolio. An aggressive investor may like to switch his/ her debt investments to equity schemes, while an investor reaching the penultimate stage of goal achievement may like to moderate the investment risk by switching from equity investments to debt investments. One may also conveniently make a lump sum investment in a mutual fund scheme, specify such scheme as the source scheme and then switch the investments to other mutual fund schemes through systematic investments.

3. Eliminating the Timing Bias

When one registers an STP, the investment transactions are automatically processed, thereby eliminating the timing bias for the investors. One may not be inclined to make investments in equity when the markets are rising or redeeming investments when the markets are falling. However, the investors may not be able to judge the market directions effectively to time the investments. Instead, one needs to inculcate a sense of financial discipline to move towards financial goals effortlessly. STP empowers the investors suitably to enable them to make steps towards their financial goals.

Stamp Duty on Mutual Fund units

Effective from 01-July-2020, mutual fund units issued against purchase transactions whether through lump-sum investments or SIP or STP or switch-ins or dividend re-investments would be subject to levy of stamp duty @ 0.005% of the amount invested. Transfer of mutual fund units such as transfers between demat accounts are subject to payment of stamp duty @ 0.015%.  Source: AMFI India

Taxation of STP

An STP simultaneously processes two transactions – a redemption transaction in the source scheme and an investment transaction in the target scheme. The redemption transaction through STP is considered at par with regular redemption transactions and, accordingly, will attract taxes at similar rates as applicable for regular mutual fund transactions. Gains may be classified as Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) based on the holding period for such investments. Here is a summary for the taxation of mutual fund units on redemption through STP or otherwise:

Source Scheme

Holding Period

Type of Gain

Tax Rate

Equity oriented funds

Less than 12 months

STCG

15%

12 months or more

LTCG

10% without indexation

Other funds, e.g., debt funds, gold funds, etc.

Less than 36 months

STCG

Regular tax rates

36 months or more

LTCG

20% with indexation

 

The investors may also avail of an aggregate exemption of Rs. 1 lakh in a year towards LTCG from equity funds and equity stocks taken together.  

STP  purchase  and redemption 

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Union Budget 2020 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.