Widely read:
I am a new to mutual funds. In the course of a conversation with a seasoned investor. I came across the concept of buying mutual funds SIP from liquid fund. This is what he told to me. You first by a liquid fund from any company from which you want to buy a mutual fund in future. You keep putting your residual saving to the liquid fund. When you want to by a mutual fund, you put a SIP instruction which will allow you to pay a mutual fund SIP installment form your liquid fund. I don't understand it fully. What are benefits of this method? What if I buy directly?
- Amit Arya
We guess the seasoned investor was talking to you about the Systematic Transfer Plan (STP). This is how it works. Suppose you have a large amount to invest and you want to invest it gradually in stocks. How would you do it? One, you can park the money in a bank savings account and start a monthly Systematic Investment Plan (SIP) to invest a fixed amount every month in an equity scheme. Another way is to park the lumpsum in a liquid fund and transfer a fixed amount from it to an equity fund through an STP. The idea behind this exercise is to earn earn a slightly better return from the lumpsum investment.
However, should remember that STP may attract capital gains tax. When you are transferring a fixed amount from the liquid fund fund to an equity fund, it is a redemption in the liquid fund and a purchase in the equity fund. If investments in liquid funds are sold before three years, the gains are added to the income and taxed as per the income tax slab applicable to the investor. If investments are sold after three years, you can pay a long-term capital gains tax of 20 per cent with indexation benefit.
This article was originally published on February 01, 2016.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
