I was recommended to do a Systematic Transfer Plan (STP). I have a lumpsum of ₹2 lakh that I want to invest in debt/liquid fund from which every month ₹25,000 will be transferred to a diversified equity fund for eight months. I want to know whether this is a good investment strategy? Also, if there would be any taxation on transfer from a debt/liquid fund to an equity fund?
- Yash
Systematic Transfer Plan (STP) allows an investor invest a lumpsum in one scheme (mostly a debt scheme) and transfer a fixed amount regularly to another scheme (mostly an equity scheme). The basic idea is to earn a little extra on the lumpsum invested in a debt mutual fund than the other method of parking the money in a bank account and investing via a Systematic Investment Plan (SIP).
Funds transferred from one mutual fund to another through STPs are considered a redemption from one fund and a fresh purchase in another. If you park money in the growth option of a debt fund and do an STP before the completion of three years, the redemption from debt fund will attract short-term capital gains tax. Such short-term gains are added to your income and taxed according to your tax slab. You can overcome this issue to a certain extent by opting for the dividend reinvestment option. This option results in zero or almost nil capital gains as all the gains are distributed as dividend by the mutual fund. The dividend income is tax-free for investors, but the mutual fund pays a Dividend Distribution Tax (DDT) at 28.3%. Still, it is a better strategy for those in the 30 per cent tax bracket, as they would have otherwise paid 30 per cent (plus cess) on the short-term gains.
This article was originally published on January 21, 2016.
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