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When it comes to investing in mutual funds, the first name that comes to most people’s mind is SIP (Systematic Investment Plan). But when an investor has a lump sum—such as a bonus, sale of land, retirement money or maturity fund—it can be too risky to invest the entire amount directly in the stock market. In such a situation, STP i.e. Systematic Transfer Plan (STP) emerges as the smartest and effective investment strategy.
Under STP, the investor first deposits his entire lump sum money in a liquid fund or short-term debt fund (Source Fund) that gives safe and stable returns. After this, under a pre-determined instruction, every week or every month, a fixed amount is automatically transferred from that debt fund to the high-return equity mutual fund (Target Fund).
| Parameter | SIP (SIP – Systematic Investment Plan) | STP (STP – Systematic Transfer Plan) |
| Source of Money | Deducted directly from the bank savings account of the investor. | Transfer takes place from liquid/debt funds of mutual funds. |
| return on remaining money | Bank account offers only nominal interest of 2.5% to 3.5%. | The remaining money kept in liquid/debt funds gives returns of 6.5% to 7.5%. |
| Suitable for whom? | For new investors with regular monthly salary/income. | Those who have lump sum amount. |
| transfer scope | Money goes directly from the bank to any fund house. | This happens between two different schemes of the same fund house (AMC). |
STP is called a smart wealth creation tool because it works on multiple fronts simultaneously:
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Direct benefits of double returns: Suppose you have ₹5 lakh. If you do a normal SIP of ₹25,000, then the bank account balance of ₹4.75 lakh will give only around 3% interest. But in STP, that entire ₹5 lakh first goes into a liquid fund, where the remaining money gets returns of around 6.5% to 7.5% and gets 12% to 15% compounding growth by transferring ₹25,000 to equity every month.
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Freedom from the risk of market timing: Whether the market is at an all-time high or in a steep decline, lump sum money does not suddenly sink into equities. By transferring money in monthly installments, the investor gets the full benefit of ‘Rupee Cost Averaging’.
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Capital Protection and Rebalancing: If there is a sudden big crash in the market, most of your money remains safe in a safe debt fund and more units can be bought at cheaper NAV.
Mutual fund companies offer a variety of STP options depending on the needs of investors:
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Fixed STP: In this, the amount to be transferred (eg ₹ 10,000 per month) and the date are pre-determined.
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Capital Appreciation STP: In this, the principal remains safe in the debt fund and only the interest/gains are transferred to the equity fund.
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Flexi/Value STP: In this, the transfer amount increases or decreases depending on the market movements. When the market falls, more money goes into equity and when the market becomes expensive, less money gets transferred.
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Taxation Rules (Capital Gains Tax): Under STP, when money is transferred from debt fund to equity, it is technically considered as ‘redemption’ (withdrawal). Therefore, debt fund profits are taxed as per your income tax slab.
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Same AMC rule: STP can always be initiated between two schemes of the same fund house (eg HDFC Liquid Fund to HDFC Top 100 Fund).
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Exit Load: Some debt or liquid funds may have a light exit load for the first 7 days, so always choose liquid/ultra-short term funds with zero or minimal exit load.