- STP transfers earn returns, each transfer incurs capital gains.
Most Indian investors have heard of the Systematic Investment Plan, or SIP. Far fewer have heard of its close cousin, the Systematic Transfer Plan, or STP. Both work on the same underlying idea, but STP quietly does what SIP simply cannot. And for a growing number of investors, that job matters a great deal.
Two Tools, One Principle
Neither SIP nor STP is an investment product in itself. They are methods of investing, ways to move money with discipline. The goal in both cases is the same: when you invest steadily over time, the average price at which you buy units works in your favour. You buy more units when prices are low and fewer when they are high. This is called rupee cost averaging.
In an SIP, a fixed amount flows automatically from your bank account to a mutual fund at a set frequency, usually once a month. The fund house transfers that part of your salary or money into the schemes you have chosen.
STP works differently. Here, you put a lump sum into one mutual fund, typically a liquid or very short-term fund, and instruct the fund house to transfer a fixed amount from that fund to another, usually an equity-oriented fund, at a set frequency. The money earns returns in the source fund while it waits to be transferred. The transfer happens systematically, giving you the same rupee cost averaging that a SIP would.
Why The Source Fund Matters In STP
The choice of a liquid or ultra-short-term fund as the parking ground is not accidental. These funds are stable in performance. The returns they generate while the money sits there are comparable to a bank fixed deposit, generally better than a regular savings account. So unlike keeping the money idle, an STP actually puts the lump sum to work from day one, even as it is being gradually moved into equity.
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Taxation Works Differently
In a regular mutual fund SIP, the tax rules follow what is called the First-In-First-Out method, or FIFO. When you redeem, the units you bought first are considered sold first. This means different units may attract different tax rates depending on how long they have been held.
In an STP, every transfer out of the source fund is treated as a redemption. So each time money moves from the liquid fund to the equity fund, you are technically selling units of the liquid fund and must pay capital gains tax on any profit made at that point. This is an important detail that investors often overlook when choosing between the two methods.
Who Should Use Which
SIP is designed for people with a regular monthly income, salaried employees who can commit a fixed amount monthly from their earnings. STPs are more suited to those who receive money in irregular chunks. A freelancer who lands a large project payment, a professional who receives an annual bonus, or anyone who comes into a windfall, these are the people for whom STP is most naturally useful.
There is a second use case for STP that has nothing to do with deploying fresh money. It is a tool for rebalancing a portfolio.
If your equity allocation has grown beyond what you intended, say from 60 per cent to something higher because the market has done well, you may not want to withdraw from equity in one go. You can instead set up an STP out of equity into a liquid fund, gradually moving money across and booking profits along the way rather than trying to time the market perfectly.
What Should You Choose
SIP is the right tool when money comes in regularly, and you want to invest as you earn. STP is the right tool when a large sum is already in hand and you want to move it into equity without taking on the full risk of investing it all at once. The two can also be used together, SIP for monthly income and STP for lump sums when they arise.
The choice ultimately depends on your financial situation at a given point in time. Knowing both options exist is the first step.
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