How to Switch, Redeem, or Set Up an STP: What Each Does and When to Use It

A switch moves your investment from one scheme to another within the same AMC. Units in the source scheme are redeemed and the proceeds are immediately reinvested in the destination scheme. The money does not pass through your bank account.

Structurally, a switch is a redemption followed by a purchase. This has two important implications that investors often overlook.

Exit load may apply

The source scheme's exit load structure applies to the units being switched out, based on how long those units have been held. If an equity fund charges 1% exit load on redemptions within 12 months and you switch out after 8 months, the 1% applies. Always check the exit load schedule before switching, especially for equity funds with recent SIP instalments.

It is a taxable event

Because a switch is treated as a redemption, capital gains tax applies on the gain in the units switched out. The holding period and gain at the time of switch determine whether it is STCG or LTCG. Many investors switch between equity funds assuming the tax event is deferred. It is not.

Log in to the DSP Invest portal or the DSP App, select Switch, choose the source and destination schemes, enter the units or amount, enter OTP, and confirm. Offline switches can be submitted at DSP branches or CAMS Investor Service Centres.

Redemption sells mutual fund units and credits the proceeds to your registered bank account. You can redeem all units or only a portion of your holding. Remaining units stay invested.

Settlement timelines

Proceeds are not credited instantly. The timeline depends on the scheme category:

T is the transaction date. Business days exclude weekends and exchange holidays. A redemption submitted on Friday after the cut-off time is processed on Monday, shifting the settlement timeline accordingly.

Instant redemption for select schemes

DSP offers an Instant Redemption facility for the DSP Liquidity Fund (Growth) and DSP Overnight Fund (Growth). Proceeds are transferred via IMPS, typically within minutes. Maximum amount that can be redeemed immediately shall be lower of a) 90% of the Current Value of Available Units or b) Rs. 50,000.

Log in to the DSP Invest portal or the DSP App, select Redeem, choose the scheme, enter units or amount, enter OTP, and confirm. Offline redemption is available at DSP branches or CAMS Investor Service Centres.

An STP transfers a fixed amount from one scheme (source) to another (destination) at regular intervals. It is commonly used to move a lump sum from a liquid or overnight fund into an equity fund gradually, rather than investing everything in equity at once.

The practical use case: you have Rs 5 lakh to invest in equity but do not want to invest it all at one price point. You park it in a liquid fund and set up a monthly STP of Rs 50,000 into an equity fund. Over 10 months, the equity exposure builds gradually across different market levels. Meanwhile, the money in the liquid fund earns some return rather than sitting idle.

STP operational rules at DSP

• Minimum instalment: Rs 100

• Minimum number of instalments: 6

• Available frequencies: daily, weekly, monthly, quarterly, half-yearly, yearly

Each STP instalment is a taxable event

Like a switch, each STP transfer is a redemption from the source scheme. If the source scheme has gains, capital gains tax applies to each transfer. For liquid fund units purchased before April 1, 2023, long-term capital gains treatment applies after 24 months at 12.5%. For liquid fund units purchased on or after April 1, 2023, gains are taxed at slab rate regardless of holding period.

In practice, STPs are typically set up on recently invested corpus, so the source fund usually has minimal gains and the tax impact is small. But it is worth verifying before setting up an STP on a source fund with older, higher-value holdings.

Log in to the DSP Invest portal or the DSP App, select New Transaction, choose Start STP, select source and destination schemes, set the type, frequency, and tenure, then review and confirm. Offline registration is available at DSP branches or CAMS service centres.

Cancelling or modifying an STP

Submit a cancellation request through the DSP portal, app, email from your registered email ID, or at a branch or CAMS service centre. Allow at least 10 business days before the next instalment date for the cancellation to take effect.

All three mechanisms switch, redemption, and STP involve a redemption from the source scheme. All three trigger capital gains tax if the redeemed units have gains. There is no mechanism within the Indian mutual fund structure to defer this tax event except by not redeeming, switching, or transferring.

This is relevant for portfolio rebalancing decisions. Switching from a well-performing equity fund to a debt fund after a strong equity run triggers LTCG on the equity gains, regardless of how the switch is structured.