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Systematic Transfer Plan: Here’s all you would like to know along with the tax implications

By Nivesh Gyan   17 December

Category: Build Wealth

Looking to invest large amount at one-go in equity mutual funds? Experts advise to avoid large investment as lump-sum in the equity mutual funds. So, what’s the option?

For the ones with funds to invest a big amount in mutual funds for long term and the will to strike a good balance between risk and return, Systematic Transfer Plan (STP) comes as a saviour.

What is actually Systematic Transfer Plan?

Systematic Transfer Plan refers to a periodic transfer from one mutual fund scheme to another, mostly from a debt mutual fund to an equity mutual fund, provided both the funds are from the same fund house. It is proven that investing in equity mutual funds in a systematic manner over a longer period generates overall better returns compared to a lump-sum investment. Systematic Transfer Plan actually help you achieve this even-though you have large amount at your disposal, which you want to invest right away.

How does one benefit from Systematic Transfer Plan?

By doing this, you are able to get the best of both worlds!
 
While you are able to systematically invest in an equity fund for smart returns, the money lying in the debt fund also ensures higher returns than a savings account in the bank.

How does Systematic Transfer Plan work?

You are sitting on a good amount of money, say Rs 6 lakhs. Here’s how you can invest your money via Systematic Transfer Plan route:

  • Choose the debt or liquid short-term fund (make sure the fund has no exit load).
  • Decide the period over which entire amount needs to be invested in an equity fund. It could range from one month to 1-2 years depending on quantum of investment.
  • Decide on the frequency of transfer i.e. daily, weekly, monthly or quarterly (weekly is ideal in our view)

Systematic Transfer Plan and Taxation

It is important to be aware about the tax implications of transfer.
 
Systematic Transfer Plan attracts short-term capital gains tax on the gains accrued on your debt fund holding, as every Systematic Transfer Plan instalment is considered as a redemption in the debt fund. If debt funds are sold before three years, the gains are treated as short-term gains and taxed according to the income tax slab applicable to the investor. However, tax rate will be the same as what would be applicable, if the money were lying in the savings / fixed deposits in a bank.
 
Despite the tax implications, using an Systematic Transfer Plan is important to ensure that you are investing in equity mutual fund in a systematic manner rather than lump-sum.