Investing in an equity fund via STP

When you are transferring a fixed amount from a liquid fund fund to an equity fund, it is a redemption in the liquid fund and a purchase in the equity fund

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.