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3 Things To Consider For Your Mutual Fund STP

Before you start an STP, you should ideally consider the tax implications of the same. Bear in mind that from a taxation standpoint, an STP is nothing but a sale of units from one scheme, and a simultaneous purchase of units in another scheme

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With stock markets turning volatile in 2022, your Advisor may have recommended the STP (Systematic Transfer Plan) route to invest fresh moneys into equity funds. Put simply, an STP is a standing instruction to transfer money from one Mutual Fund scheme to another, at a predefined interval. Here are three things for you to consider before you start one.

Duration & Frequency

It’s quite common for investors to be confused while selecting the tenor of their STP’s. Should you stagger your investments in/out of equity funds over 6 months, 12 months, 24 months or 36 months? To be able to take an effective decision on this front, you’ll need to have a view on the near-term direction of the equity markets. If markets have already run up significantly of late, you should ideally shorten the duration of your STP’s out of equity funds, and lengthen the tenors of your STP’s into equity funds. Conversely, you should shorten your STP durations if markets have corrected heavily and you’re investing into equity funds, and increase your STP durations in bearish markets if you’re staggering out of equity funds. Also, if you’re expecting markets to be volatile and range bound in the near term (the present day scenario scenario), a weekly mode STP might offer better rupee cost averaging benefits than a monthly STP.

Reason

It’s a common misconception that STP’s are only meant to transfer moneys from debt to equity mutual funds. However, this isn’t true. STP’s can serve different purposes for different investors, depending upon their life stage and preferences. STP’s can be used for two purposes – systematic de-risking, and systematic equity investing; and you need to be very clear on which one of these you’re trying to accomplish. For instance – if you’re looking to make a long-term investment into equities, but are worried about market valuations, you can invest your money into a liquid fund by the same AMC, and issue an STP instruction to the AMC instead of investing a lump sum. Conversely, you may already be invested into equity funds for many years, and sitting on a handsome profit. In such a scenario, an STP can be used to book profits in a disciplined manner – which is usually far more effective than booking all your profits on a single day.

Tax Considerations

Before you start an STP, you should ideally consider the tax implications of the same. Bear in mind that from a taxation standpoint, an STP is nothing but a sale of units from one scheme, and a simultaneous purchase of units in another scheme. Mutual Funds follow a FIFO (First In, First Out) rule for partial liquidations, and so an STP out of a particular fund will involve the liquidation of units, starting from the first ones you purchased. Ideally, you’d want to minimize your tax liability by ensuring that none of the equity/ equity-oriented fund units that you bought in the past 12 months are transferred out as a result. 


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Systematic Transfer Plan Systematic Transfer Plans