What are STPs?

What are STPs (Systematic Transfer Plans)?

Understand STP mutual fund strategies, how a systematic transfer plan works, taxation and how to use it wisely

Written by : Knowledge Centre Team

2026-02-23

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7 minutes read

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Imagine you have a lump sum amount ready to invest. Putting it all into equity at once may expose you to timing risk. Waiting too long may mean missing opportunities. This is where a systematic transfer plan becomes relevant.

An STP allows you to gradually shift money from one mutual fund to another in a structured manner. It brings discipline to asset allocation and reduces the stress of trying to “time the market”.

Let us understand how an STP mutual fund works, its benefits, taxation and when it makes sense to use one.

Key Takeaways


  • A systematic transfer plan allows the gradual transfer of funds between mutual fund schemes
  • It is commonly used to move money from debt funds to equity funds
  • Each transfer is treated as a redemption and may attract capital gains tax
  • STPs help reduce market timing risk for lump sum investments
  • They are suitable for investors seeking disciplined asset allocation

What is a Systematic Transfer Plan (STP)?

A systematic transfer plan is a facility offered by mutual fund houses that allows investors to transfer a fixed amount from one mutual fund scheme to another at regular intervals.

In an STP mutual fund, money is typically first invested in a relatively stable scheme, such as a debt fund. From there, a pre-determined amount is periodically transferred into a target scheme, usually an equity fund. This process continues automatically until the specified amount is fully transferred.

Unlike a SIP (Systematic Investment Plan), where money moves from your bank account to a mutual fund, a systematic transfer plan shifts money between two schemes within the same fund house.

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How Does an STP Mutual Fund Work?

An STP follows a simple three-step structure:

  1. Step 1: The investor parks a lump sum amount in a debt or liquid mutual fund, which is the source fund. 
  2. Step 2: A fixed amount is transferred monthly, weekly or quarterly to a target fund.
  3. Step 3: Over time, the entire amount gets systematically deployed into the equity scheme.

Example: Suppose you invest ₹5,00,000 in a debt fund and set up a systematic transfer plan of ₹50,000 per month into an equity fund.

Over 10 months, your corpus gradually shifts into equity, reducing the risk of entering the market at a peak.

Types of Systematic Transfer Plans

There are three main types of STPs:

  • Fixed STP: This is the most commonly used format for an STP mutual fund strategy, in which a fixed amount is transferred at regular intervals, regardless of market conditions. For example: ₹20,000 per month transferred for 12 months. 
  • Capital Appreciation STP: Only the capital gains generated in the source fund are transferred to the target fund. Here, the principal amount remains intact in the original scheme. This method is often used when investors want to preserve capital while deploying returns into equity.
  • Flexible STP: The transfer amount varies depending on market conditions or predefined triggers. For instance, a higher amount may be transferred during market dips and a lower amount during rallies. This requires more active strategy alignment.

Why Investors Use STPs?

A systematic transfer plan is not merely a convenience feature. It is a strategic tool designed to manage lump sum investments with structure and discipline. Here is why many investors prefer an STP mutual fund approach:

  • Reduces Market Timing Risk: One of the biggest challenges in investing a lump sum is deciding when to enter the market. If the entire amount is invested just before a correction, short-term losses can be significant. A systematic transfer plan reduces this timing risk by spreading investments over multiple intervals. Instead of committing the full capital at one NAV level, the investment is staggered, which helps cushion the impact of sudden volatility and sharp market swings.
  • Helps in Cost Averaging: When funds are transferred periodically from a debt scheme into equity, purchases happen at different market levels. This creates a rupee-cost-averaging effect, where more units are bought when markets are low and fewer when markets are high. Over time, this averaging mechanism can smooth out volatility and reduce the impact of entering the market at an unfavourable level. It adds consistency to long-term wealth creation.
  • Efficient Deployment of Idle Funds: Large sums often remain parked in savings accounts while investors wait for the “right time” to invest. This leads to an opportunity cost, as savings accounts typically yield lower returns. With a systematic transfer plan, the lump sum can be invested in a debt or liquid fund that generates modest returns while gradually being transferred to equity. This ensures that money remains productive rather than idle.
  • Supports Asset Allocation Discipline: Asset allocation plays a critical role in managing risk and returns. An STP mutual fund strategy allows investors to transition funds between asset classes without abrupt shifts. For example, moving gradually from debt to equity or vice versa helps maintain portfolio balance. This structured approach supports long-term allocation goals and reduces the risk of emotionally driven allocation changes.
  • Useful During Volatile Markets: Market uncertainty often leads to hesitation or impulsive decisions. A systematic transfer plan promotes automation and reduces emotional interference. By pre-defining transfer amounts and frequency, investors avoid reacting to daily news cycles or short-term market fluctuations. In volatile phases, staggered investing can provide psychological comfort while maintaining exposure to growth opportunities.
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Did You Know?

Even international mutual fund schemes offered in India now allow STP registrations as a mode of investing


Source: ET

ULIP 19.45%

STP vs SIP

While SIP builds investments gradually from income, an STP mutual fund strategy is designed to manage lump sum investments more efficiently. Understanding the difference is crucial.

Feature

STP

SIP

Money Flow

Fund to Fund

Bank to Fund

Ideal For

Lump sum deployment

Regular investing

Tax Trigger

Yes (on transfer)

No (on investment)

Risk Mitigation

Yes

Yes

Taxation of Systematic Transfer Plans

While a systematic transfer plan helps you manage market risk and deploy lump sums gradually, it’s important to understand how STP taxation works, because each transfer creates a taxable event.

  • Every STP Transfer is a Redemption: In the eyes of the tax department, every amount moved from the source fund to the destination fund under an STP is treated as a redemption from the source scheme. That means capital gains tax may apply each time a transfer occurs, even though the money stays within mutual funds.
  • Short-Term vs Long-Term Gains: The tax rate depends on how long you held the units being redeemed at each transfer:
    1. Equity-Oriented Funds:
      • If the units are sold within 12 months, any gains are considered short-term capital gains and taxed at about 20%
      • If held for 12 months or more, gains above ₹1.25 lakh are taxed at 12.5% without indexation as long-term capital gains
    2. Non-Equity Funds (Debt, Hybrid Etc.): Gains on units sold within 3 years typically attract tax at your income tax slab rate (short-term). Units sold after 3 years may be eligible for long-term capital gains taxation with indexation benefits (~20% with indexation), depending on the scheme.

When Should You Consider an STP?

An ystematic transfer plan may be suitable in the following situations:

  • When you receive a lump sum, such as a bonus, inheritance, or maturity proceeds, and want gradual exposure to equity rather than investing all at once

  • When markets appear volatile or uncertain, and you prefer staggered deployment rather than immediate lump sum entry

  • When you are gradually increasing equity allocation as part of a portfolio rebalancing strategy

  • When you are approaching retirement and want to move funds from equity to debt in a phased manner to reduce risk

Who Should Avoid STPs?

An STP mutual fund strategy may not be suitable for:

  • Investors without a lump sum corpus

  • Those needing immediate liquidity

  • Individuals with very short investment horizons

  • Investors who prefer active tactical allocation

Understanding suitability is critical before adopting a systematic transfer plan.

Conclusion

A systematic transfer plan is not about chasing returns. It is about managing risk intelligently. In volatile markets, discipline often matters more than timing. An STP mutual fund strategy helps investors transition funds across asset classes in a structured, tax-aware manner.

For investors with lump sum capital and a long-term horizon, STPs can serve as a bridge between safety and growth, without exposing the entire corpus to immediate market risk.

The key lies in aligning the strategy with goals, time horizon and risk appetite.

Glossary

  1. Systematic Transfer Plan: A facility to transfer money periodically from one mutual fund scheme to another
  2. Source Fund: The mutual fund scheme from which money is transferred under an STP
  3. Target Fund: The mutual fund scheme that receives money through the STP transfer
  4. Rupee Cost Averaging: Investing at regular intervals to average purchase cost across market levels
  5. Capital Gains Tax: Tax levied on profit earned when mutual fund units are redeemed or transferred
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FAQs

A systematic transfer plan allows you to move a fixed amount periodically from one mutual fund scheme to another within the same fund house.

SIP invests money from your bank into a mutual fund, while an STP transfers money between two mutual fund schemes.

Yes. Each transfer in an STP is treated as redemption from the source fund and may attract capital gains tax.

Investors with a lump sum amount who want gradual equity exposure without timing the market may consider an STP.

Yes. Most fund houses allow investors to pause, modify or cancel a systematic transfer plan as per scheme rules.

The minimum amount varies by fund house, but many allow STPs starting from ₹500 or ₹1,000 per transfer.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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