A Systematic Transfer Plan (STP) automatically moves a fixed amount from one mutual fund scheme to another at regular intervals — typically from a liquid/debt fund to an equity fund.
STP is used when you have a lump sum to invest but don't want to deploy it all at once into equity (to avoid timing risk). You park the full amount in a liquid or short-term debt fund, then set up an STP to transfer a fixed sum into your target equity fund every week or month. This way, you earn returns on the parked amount while gradually investing in equity — combining the safety of staggered entry with the income of the interim fund.
Say you received a ₹10 lakh bonus and want to invest in an equity fund, but you're worried the market is high. Instead of investing ₹10 lakh at once, you put it all in a liquid fund, then set an STP to move ₹50,000 per month into the equity fund over 20 months. You earn ~6-7% on the liquid fund while waiting, and average your equity entry cost over 20 months.
You invest a lump sum in the source scheme (usually liquid or ultra-short duration fund).
You register an STP to transfer a fixed amount (minimum ₹500 or ₹1,000 depending on AMC) on a specific date each week/month.
On each STP date, units worth the transfer amount are redeemed from the source and invested in the target scheme at respective NAVs.
STP transactions are treated as redemptions from the source — exit loads and capital gains tax may apply.
The process continues until the source fund balance is exhausted or you stop the STP.
You receive ₹6,00,000. You invest it in HDFC Liquid Fund. You set an STP of ₹50,000/month to HDFC Flexi Cap Fund. Over 12 months, ₹6 lakh moves from the liquid fund to the equity fund in 12 equal tranches. Meanwhile, the liquid fund earns ~0.5% per month on the declining balance.