Back

Systematic Transfer Plan (STP): Meaning, Types and Benefits

30 Jun, 2025

4 mins read

Investing in mutual funds offers a wide range of options, allowing investors to tailor their strategies based on their goals and risk appetite. One such strategy is the Systematic Transfer Plan (STP) - a helpful tool that ensures disciplined investing by transferring funds regularly between two mutual fund schemes. But what is STP in mutual funds, and how does it work? Let’s understand this smart investment technique in detail.

What is STP in Mutual Funds?

STP, or Systematic Transfer Plan, is an investment strategy that allows an investor to transfer a fixed amount of money at regular intervals from one mutual fund scheme to another. Typically, the transfer is from a debt or liquid fund to an equity fund or vice versa, depending on market outlook and the investor’s risk strategy.

This approach helps in averaging out the purchase cost in volatile markets and is often used to gradually move a large sum invested in a debt fund to an equity fund for better long-term returns. In essence, STP in mutual funds provides a structured way to reallocate funds and manage market volatility.

How Does STP Work?

Here’s a simple breakdown:

You invest a lump sum in a liquid or debt fund.
Instead of moving the entire amount to equity in one go, you set up an STP to transfer a fixed amount periodically.
This helps reduce the risk of market timing and allows you to benefit from rupee cost averaging.

Example:

You invest ₹5,00,000 in a liquid fund and opt for an STP of ₹25,000 per month into an equity fund. Over 20 months, the entire amount is shifted gradually, reducing exposure to market volatility.

Types of STP in Mutual Fund

There are three primary types of STP in mutual fund investing:

Fixed STP: Transfers a pre-defined, fixed amount at set intervals. Commonly used for its simplicity and predictability.
Capital Appreciation STP: Transfers only the gains (capital appreciation) from the source scheme to the target scheme, preserving the original investment.
Flexi STP: Adjusts the transfer amount based on market performance. More is transferred in favourable conditions, less in uncertain times.

Each type has its own use case and is chosen based on the investor’s objective, market conditions, and desired returns.

Benefits of Systematic Transfer Plan

Using an STP can offer several advantages to investors:

Rupee Cost Averaging: Buy more units when prices are low and fewer when high, reducing the average cost per unit.
Better Returns on Idle Funds: Money earns stable returns in debt/liquid funds before being moved to equity.
Reduces Market Timing Risk: Ideal for those hesitant to make lump sum investments in volatile markets.
Improves Liquidity Planning: Helps stagger investments according to goals and market dynamics.
Customisation: STPs can be tailored by amount, frequency (daily, weekly, monthly), and duration.

STP vs SIP

While both involve disciplined, periodic investments, STP vs. SIP comes down to the source of funds:

SIP (Systematic Investment Plan): Pulls money directly from your bank account into a mutual fund.
STP: Transfers money from one mutual fund scheme (usually a debt fund) to another (often an equity fund).

SIP is ideal for investing new income, whereas STP is better suited for reallocating an existing corpus.

STP Tax Implications

Understanding STP tax implications is essential. Every transfer in an STP involves redemption from the source scheme and a fresh purchase in the target scheme, making each transfer a taxable event.

From Debt Funds (Source):
- Short-Term Capital Gains (STCG): Taxed as per your income tax slab if held <3 years.
- Long-Term Capital Gains (LTCG): Taxed at 20% with indexation if held >3 years.
To Equity Funds (Target):
- Tax is applicable only when you redeem units from the equity fund, not during the transfer.

So, each transfer from a debt fund in STP may result in a small tax liability, which must be planned for accordingly.

Conclusion

A Systematic Transfer Plan is a strategic investment tool for gradually transitioning from debt to equity, balancing return potential with risk management. Especially useful for lump sum investments during volatile times, STP offers a smarter way to enter equity markets without going all in at once.

While the STP meaning in mutual fund investing is relatively simple, understanding its mechanics, tax implications, and fit within your financial plan is key. Consulting with a financial advisor is always a good idea before initiating a transfer strategy.