What is STP in Mutual Fund?

Investing in Mutual Funds can sometimes feel like navigating a roller coaster—volatile and unpredictable. A Systematic Transfer Plan offers a smarter way to invest by gradually shifting funds from a low-risk investment to one with higher growth potential.

What is an STP (Systematic Transfer Plan)?

This plan allows you to reallocate funds from one Mutual Fund plan to another in the same fund house. The primary aim of an STP is to manage market risks while maximising returns.

How STPs work:

First, invest in a low-risk Mutual Fund (e.g. Debt Fund).
A fixed sum is regularly transferred to a higher-risk, higher-return fund (Equity Fund).

Types of STP in Mutual Funds

1. Fixed STP

A fixed amount is transferred from the main fund to the target fund at regular intervals (quarterly, monthly or weekly).
It offers consistency and works well if you are looking for a long-term investment.

2. Capital appreciation STP

Only the profits (capital appreciation) from the origin fund are transferred to the target fund.
This method preserves capital while exclusively reinvesting profits.

3. Flexible STP

The transfer amount varies based on market conditions or your financial goals.
You can choose to increase or decrease transfers depending on fund performance.

Features of a Systematic Transfer Plan

Automated transfers: STPs automatically transfer the chosen amount between schemes at a chosen frequency.
Flexibility: You can customise the transfer amount, frequency, and type of STP based on your financial targets and risk tolerance.
Disciplined investing: Regular transfers promote consistent investing, helping you to stick to a strategy without involving emotions.

Advantages of an STP in Mutual Fund

Rupee-cost averaging: It reduces the average investment cost by letting you purchase more units when prices are low and fewer when high.
Portfolio rebalancing: STPs gradually shift funds between schemes to maintain the desired asset allocation and risk exposure.

Who should invest in an STP?

Risk-averse individuals: Suitable for you if you prefer phased investments.
Goal-based investors: Helps you align investments with your financial goals.
Portfolio rebalancers: Helps you maintain asset allocation.
Tax-conscious investors: It optimises tax efficiency over lump sum investments.

Things to remember when investing with an STP

Choice of funds: Select the appropriate source and target funds.
Frequency: Plan the transfer period and frequency for optimal returns.
Exit load: Check for any charges on withdrawals from the source fund.
Tax implications: Be aware of tax on capital gains from each transfer.
Fund house restrictions: Verify minimum investment requirements and STP rules.

Conclusion

An STP in a Mutual Fund is a wise investment strategy that helps you manage risk, optimise returns, and maintain financial discipline.

Also Read: Mutual Fund vs. SIP: What’s the difference

FAQs

How does an STP help you deal with volatility?

An STP helps manage volatility by spreading investments over time. Instead of a lump sum, STPs ensure gradual exposure to equities, reducing the impact of market fluctuations.

How to set up an STP?

To start an STP, invest in a Debt or Liquid Fund, choose an STP type and frequency, submit the request, and monitor performance.

What are the disadvantages of STP?

STPs attract capital gains tax on transfers, potential exit load charges, restriction to the same AMC, and exposure to market risks.

How to stop or modify an STP?

You can stop or modify an STP by cancelling it online and submitting a request to your AMC.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.