What is STP? How does STP work?

What is STP? How does STP work? 1When it comes to mutual fund investments, there are two ways by which you can invest – lumpsum or SIPs (Systematic Investment Plans). Most experts recommend investing via SIPs as it allows you to minimise related market risks and earn good returns in the long run. STP or Systematic Transfer Plan is a similar risk-mitigating investment strategy that can protect against market volatility.

This article helps understand STP in detail and how to do STP.

What is STP?

An STP is considered a useful investment method that lets you transfer a fixed amount from one mutual fund scheme to another, usually from debt funds to equity mutual funds. It is similar to SIPs where you can transfer money from your bank account to equity mutual funds periodically.

The three main factors to consider before opting for an STP are – the market view, your risk profile and your current allocation to equities. For example, if the markets are at a new high, it could make sense to invest in mutual funds via STPs.

How do STPs work?

Let us assume you receive Rs.10 lakh from a bonus or sale of an asset and wish to invest in mutual funds online through STP over 20 months. You can start by selecting a debt fund with an STP option to invest in equity funds. Then, select the equity fund of your choice. After choosing the funds, you can invest Rs.10 lakh in the debt fund. Lastly, decide the frequency and amount of transfers to be made to the equity fund. In this case, you can transfer Rs.50,000 monthly over 20 months from your debt funds to equity funds.

It is important to note, STPs are treated as redemption and taxed accordingly. So, when you transfer money from debt funds, it is treated as a redemption and taxed based on the holding period. Similarly, the amount transferred to the equity fund is treated as a new investment and taxed depending on the holding period, if they are redeemed later.

How to set up an STP?

Setting up an STP is simple. All you have to do is fill the STP form online on the website of the concerned AMC mutual fund house. Alternately, you can also fill the print copy and submit it personally at the office of the mutual fund house. In the form, you can specify the date, amount and duration of the STP. For example, an STP of Rs.20,000 on the 10th of every month for two years.

Conclusion

STP is a practical tool that allows you to enjoy the benefits of mutual funds. It can help you manage market risks without impacting your yields. You can achieve various financial goals such as purchasing a property, child’s education and other purposes through STPs.

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