How does a Systematic Transfer Plan (STP) operate between schemes of the same mutual fund house?

[ A ]It transfers physical paper share certificates by courier between two different asset management companies.

[ B ]It is completely exempt from all capital gains taxes and exit loads under all circumstances.

[ C ]It guarantees that the target scheme's NAV will double within the first six months.

[ D ]It executes a periodic redemption from a source scheme (attracting applicable exit loads and capital gains tax) and an automatic purchase into a target scheme at prevailing NAVs.[ CORRECT ]

Takeaway

Option D is correct: It executes a periodic redemption from a source scheme (attracting applicable exit loads and capital gains tax) and an automatic purchase into a target scheme at prevailing NAVs.

Derivation

A Systematic Transfer Plan (STP) automates regular transfers from a source scheme (usually a low-volatility liquid or short-term debt fund) into a target scheme (typically an equity fund) of the same mutual fund. Each STP instalment operates legally and operationally as two simultaneous legs: a redemption from the source scheme and a purchase into the target scheme at applicable NAVs. Consequently, each transfer is treated as a redemption for tax and exit load purposes on the source scheme. This tests STP mechanics. A common mistake is believing STPs are tax-neutral internal movements.

Why the others fail

A — It transfers physical paper share certificates by courier between two different asset management companies.

STP is an electronic transaction between schemes of the same AMC, not a physical courier of share certificates across AMCs.

B — It is completely exempt from all capital gains taxes and exit loads under all circumstances.

Redemptions from the source scheme in an STP trigger capital gains tax and exit load calculations under income tax laws.

C — It guarantees that the target scheme's NAV will double within the first six months.

Mutual fund investments cannot promise or guarantee NAV appreciation or doubled returns under SEBI regulations.