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Mutual Fund Systematic Transfer Plan (STP): How It Works, Taxation, Other Details

STP is similar to systematic investment plans or SIPs, where money is transferred from bank account to equity mutual funds.

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Mutual Fund Systematic Transfer Plan (STP): How It Works, Taxation, Other Details

In fixed STPs, a fixed sum is transferred from a debt fund to an equity mutual fund.

Highlights

  1. In STP, money is transferred from a debt mutual fund to an equity mutual
  2. STP helps protection from volatility through averaging of cost
  3. Systematic transfer plan is similar to systematic investment plan (SIP)
What is Systematic Transfer Plan or STP? It is a method of investing in mutual funds. Under Systematic Transfer Plan (STP) method of investing an investor transfers a fixed amount of money from one category of fund to another in a fixed interval- usually from a debt fund to an equity fund. Suppose you have received a lump-sum amount from asset sale or a big bonus and want to invest in equity mutual funds. In this case, financial experts advice investing through Systematic Transfer Plan (STP) because it helps protect investor's lump-sum money from market volatility as equity funds are linked to the performance of stock markets.

STP is similar to systematic investment plans or SIPs, where money is transferred from bank account to equity mutual funds. In STP, money is transferred from a debt mutual fund to an equity mutual fund in few instalments so that the overall purchase price gets averaged out.

"STP is an effective tool in mutual funds to average your investment over a defined period. To decide on whether one should do a STP or lump-sum depends on three factors - an investor's current allocation to equities, risk profile of investor and finally the market view. Currently, with the markets at a new high, it would be prudent for investor's to follow a STP route," says Manoj Nagpal, CEO of Outlook Asia Capital.

How STP Or Systematic Transfer Plan Works: Suppose you have received 10 lakh from an asset sale and want to invest in an equity fund through STP over 20 months. First you have to select a debt fund which allows STP option for investing in an equity fund. Then select an equity fund. Invest Rs 10 lakh in the debt fund and then decide the amount which will be transferred from debt fund to equity fund and the frequency. (In this case, Rs 50,000 has to be transferred in 20 installments on a monthly basis).

Benefits Of STP: Protection from volatility through averaging of cost: Like SIP or systematic investment plans, in STPs the price you buy equity mutual fund is averaged over many months. In case on a falling market, it helps to accumulate more units for the same amount of money.

Your money in debt funds helps to better returns than in savings accounts.

Types Of STP: In fixed STPs, a fixed sum of money is transferred from a debt mutual fund to an equity mutual fund. In capital appreciation STP, only the gains from the debt mutual fund are invested in the other fund. Flexi STP is another option in which the amount transferred depends on the volatility in the equity market.

How does one decide about STP period? The amount of lump-sum to be transferred via STP, an investor's current allocation to equities, risk profile of investor and finally the market view are some of the factors, say financial experts. They also say that investing in equity funds via STP over a very long period (for example, over three years) negates the advantage of putting the money to work in equities.

Taxation on Systematic Transfer Plans When you transfer money from debt fund, it is considered as a redemption, which is taxable depending on the holding period. The amount transferred to an equity mutual fund is considered a fresh investment and if they are redeemed later, they are taxed depending on holding period.

How Income From Debt Mutual Funds Are Taxed? Investments in debt funds are considered long term only if they are held for more than three years. Currently, the long-term capital gain on debt funds is taxed at the rate of 20 per cent. However, investors get the benefit of indexation on their original investment. This means that the original investment is adjusted for the price of inflation and taxed accordingly. Since the original cost of investment goes up after factoring in inflation, long term capital gains tax comes to negligible levels.

How Income From Equity Mutual Funds Are Taxed? For tax purposes, any mutual fund that invests 65 per cent or more of its portfolio in equities or equity-related instruments, are considered equity funds. If you redeem or withdraw your investments in equity mutual funds after 12 months, your investments would be considered as long term. Currently, the tax on long-term capital gain is zero. But if you sell or redeem your equity mutual fund investments before 12 months, you will have to pay short-term capital gains tax at a flat rate of 15 per cent.

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