Moving a lump sum in with an STP

You have a lump sum and want it in equity, but putting the whole amount in on a single day feels like a big bet on that day. A Systematic Transfer Plan (STP) is the tool for phasing it in. It is the same idea as a SIP, except the money is already inside the fund house and moves internally rather than arriving from your bank each month.

What an STP is

An STP automatically moves a fixed sum from one scheme — the source — into another — the target — at a set interval, all within one fund house. You park the lump sum in the source, usually a low-volatility liquid or debt scheme, and it feeds the target, often an equity scheme, in instalments over weeks or months.

How it works, step by step

Three steps. First, you invest the lump sum in the source scheme. Second, you set the transfer amount, the interval and the target scheme. Third, at each interval the fund house redeems that amount of the source and buys units of the target at its NAV that day. The money is invested from day one (in the source) and arrives in the target gradually, so you are never fully in cash and never fully committed on a single day.

The tax and cost to know

The part people miss: each transfer is a redemption from the source scheme, so it can be a taxable event — a capital gain or loss on the source — and it may attract an exit load on recently bought source units. The source scheme also carries its own risk: a debt or liquid scheme is steadier but not risk-free, and its value can move. So an STP is not free of consequence, and the tax rules that apply can change at a budget — the STP calculator lays out the transfer schedule for an amount and interval you choose, and a qualified tax adviser can confirm the tax.

Where it fits

An STP sits between two other choices. Investing the whole lump sum at once puts your full amount to work immediately, and takes the full risk of that one day’s price. Leaving it in the bank and starting a fresh SIP keeps it idle until each instalment goes in. The STP is the middle: invested from day one in the source, moving into the target on a schedule. It suits someone with a lump sum who wants to phase into equity without either the single-day timing risk or leaving the money doing nothing. It does not remove market risk or guarantee a better result than a lump sum — sometimes investing at once does better, sometimes worse; the STP trades some of that swing for a smoother entry.

STP, SIP and lump sum

In one line each: a SIP brings new money in from your bank each month; a lump sum invests everything at once; an STP takes a lump sum you have already invested in a source scheme and moves it into the target in steps. They answer different situations, so the right one depends on whether you have a lump sum to phase or a monthly amount to commit.