What is STP in Mutual Funds and Why You Should Care?
Imagine you have a sum of money and want to invest, but the markets are unpredictable, and you don’t want to mess up your timing. That’s where Systematic Transfer Plan (STPs) in mutual funds come in.
This strategy has become increasingly relevant in 2025 as central banks globally strive to balance inflation and growth, thereby opening up new opportunities to shift money between assets.
In simpler terms, think of STP in mutual funds as the cousin of SIPs (Systematic Investment Plan), but instead of investing small sums from your bank account, you move money within your mutual funds in a smart, phased-out manner.
Let’s break it down.
What’s an STP?
An STP allows you to automatically transfer money from one mutual fund scheme to another, typically from a low-risk debt fund to a higher-risk equity fund. This strategy involves gradually transferring money from a debt or liquid fund (low risk) to an equity fund (higher risk). The goal is to mitigate the risk of investing a large sum directly into a volatile market while still participating in potential growth.
The transfer is done periodically, on a weekly, monthly, or quarterly basis.
It’s ideal if:
You’ve got a lump sum you want to invest.
You’re not keen to dive into equities all at once.
You want more control without constantly checking the market.
SEBI mandates no minimum investment amount through STP. However, most asset management companies require a minimum investment of ₹12,000 to be eligible for this scheme.
How STP Works
Initial Investment: You begin by investing your lump sum in a relatively safe, low-volatility fund, such as a debt or liquid fund.
Scheduled Transfers: You set up a plan to transfer a predetermined amount from this fund to an equity fund at regular intervals- weekly, monthly, or quarterly.
Automatic Execution: The transfer occurs automatically according to your chosen schedule, allowing your unused funds to continue earning returns in the debt fund until they are fully invested in the equity fund.
Why STPs?
There are several reasons why STPs can be beneficial for investors:
Mitigating Market Timing Risk: STPs help avoid the risk of investing a lump sum at a market peak by spreading the investment over time.
Disciplined Investing: They encourage a systematic approach to investing, especially when markets are volatile or near all-time highs.
Rupee Cost Averaging: Like SIPs, STPs benefit from rupee cost averaging, potentially lowering the average cost of your investment over time.
Flexibility: STPs offer flexibility in terms of transfer frequency and duration, allowing investors to customise their investment strategy.
Capital Appreciation: STPs can be used to gradually shift from a debt fund to an equity fund, potentially maximising returns over time, as equity funds generally offer higher potential returns.
Risk Management: STPs enable investors to balance risk and returns by gradually increasing their exposure to higher-risk assets, such as equities.
Efficient Idle Fund Utilisation: Instead of keeping a large sum idle in a savings account, an STP allows you to invest it and still benefit from market fluctuations, as debt funds usually offer higher returns than savings accounts.
Types of STPs You Should Know
Fixed STP: Transfers a pre-decided amount at regular intervals (most common).
Capital Appreciation STP: Only the gains from the source fund are transferred.
Flexible STP: The transfer amount is adjusted based on market conditions or NAV.
Most investors prefer Fixed STPs as they are simple and predictable.
Tax Angle: What to Watch
Each transfer via STP is treated as a redemption from the source fund and an investment into the target fund.
Short-term Capital Gains (STCG) on debt/liquid funds apply if held for less than one year..
According to FY25 tax laws, debt funds no longer receive indexation. As per the government statement, indexation has been done away with for ease of computation, with a simultaneous reduction of the rate from 20% to 12.5%. These new rules apply to any transfers made on or after July 23, 2024. So, if you’re using an STP, make sure to factor in the impact of these post-tax returns while planning.
Equity STCG (20%) applies if you redeem target funds before one year. The tax rate for STCG under Section 111A has been increased from 15% to 20% in the Union Budget 2025.
Disclaimer: The above information is for educational and informational purposes only. Consult a tax advisor when using STPs for large sums.
How to Start an STP
Online:
Step 1: Choose your source fund (usually a liquid/ultra-short debt fund).
Step 2: Choose your target fund (usually an equity fund).
Step 3: Decide your STP amount and frequency.
Step 4: Use your mutual fund app/platform to set it up.
Step 5: Monitor transfers & rebalance if needed.
Offline:
Prefer the traditional route? You can start an STP by visiting the mutual fund house’s branch or through a financial advisor. Though slower than online methods, it’s a good option if you value face-to-face guidance or need personalised help.
Tip: A Systematic Transfer Plan (STP) in mutual funds allows you to move money only between schemes within the same asset management company (AMC), not between schemes of different AMCs.
Common STP Mistakes to Avoid
Not Aligning with Goals
Selecting funds or transfer settings without linking them to clear goals, such as retirement or wealth creation, can derail outcomes.
Ignoring Market Trends
STPs work best when reviewed periodically. Investing blindly in a falling market without adjustments can harm returns.
Overlooking Costs
Exit loads, fund fees, or tax rules can eat into returns if not accounted for, especially with frequent transfers.
Set It and Forget It
STPs aren’t completely hands-off. Regular reviews ensure they stay aligned with your changing goals and market shifts.
Mismatched Funds
Choosing source or target funds that don’t align with your risk appetite or investment horizon can lead to suboptimal performance.
No Customisation
Using default STP settings may not suit your needs. Tailor transfer amounts, frequency, or use trigger-based STPs to maximise value.
Bottom Line
STPs are a smart blend of safety and strategy, especially in a market like India’s, where volatility is the only constant in the short term. By enabling precise control over asset allocation dynamics while automating behavioural discipline, STPs address critical gaps in India’s evolving investment landscape.
Curious to try it? Start with a modest amount and see how it fits into your overall investment strategy.
Disclaimer: The information provided in this article is for informational purposes only and is not intended as financial, investment, or professional advice. Readers are encouraged to seek independent advice before acting on any information contained in this article. Smallcase Technologies Private Limited disclaims any responsibility for actions taken based on the content of this publication.