Question 1

What is a Systematic Transfer Plan (STP)?

Accepted Answer

An STP is a facility where you invest a lump sum in one mutual fund (usually a debt/liquid fund) and systematically transfer a fixed amount at regular intervals to another fund (usually an equity fund). This reduces the risk of market timing while keeping your idle money earning returns in the source fund.

Question 2

Is STP better than lump sum investing?

Accepted Answer

STP reduces timing risk by spreading equity investments over time, similar to SIP. In volatile markets, STP typically outperforms lump sum on a risk-adjusted basis. However, in a consistently rising market, lump sum may give higher absolute returns since you miss out on early compounding with STP.

Question 3

What is the tax treatment of STP transfers?

Accepted Answer

Each STP transfer is treated as a redemption from the source fund and a fresh purchase in the destination fund. For debt fund transfers held less than 3 years, gains are taxed as short-term capital gains at your slab rate. Equity fund transfers held less than 1 year attract 15% STCG tax.

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