Types of Transactions — Purchase, Redemption, Switch, STP
Mutual fund transactions are the operational actions through which investors buy, sell, or move their investments. The four primary transaction types are: Purch...
Types of Transactions — Purchase, Redemption, Switch, STP
Mutual fund transactions are the operational actions through which investors buy, sell, or move their investments. The four primary transaction types are: Purchase (subscription of new units), Redemption (sale of existing units for cash), Switch (transfer from one scheme to another within the same AMC), and STP (Systematic Transfer Plan — automatic periodic switch from one scheme to another). Each transaction type has specific NAV applicability, settlement timelines, and tax implications.
These four transaction types form the bread and butter of daily operations for any mutual fund distributor. Every client interaction ultimately results in one of these transactions, making thorough understanding essential. Purchase or Subscription is when an investor buys units — either as a lumpsum (one-time) or through SIP (recurring). The investor gets units at the applicable NAV based on cut-off time rules. A stamp duty of 0.005% applies to all purchase transactions. Redemption is when the investor sells units for cash. It can be full redemption (all units) or partial (either by specifying an amount or a number of units). Redemption proceeds for equity funds are credited within T+3 business days, and for liquid/overnight funds within T+1 business day. A Switch is essentially two transactions bundled together: redemption from the source scheme + purchase in the target scheme, both within the same AMC. A critical point that new distributors often miss is that a switch has TAX implications on BOTH legs. The redemption from the source scheme triggers capital gains tax, and the purchase in the target scheme starts a new holding period. STP (Systematic Transfer Plan) is an automated switch at regular intervals — usually used to move money gradually from a liquid/debt fund into an equity fund. Each STP installment is treated as a separate switch transaction for tax purposes. Redemption timelines are critical: equity and balanced funds settle within T+3 business days, liquid and overnight funds within T+1. ELSS funds have a mandatory 3-year lock-in — no redemption allowed before that.
A Practical Example
Consider the case of Neeta, an MFD in Mumbai, who manages the portfolio of Mr. Vinod Mehta (age 58, planning for retirement in 2 years). Here are the transactions Neeta processes in one quarter:
1. Purchase: Vinod invests ₹5,00,000 lumpsum in ICICI Prudential Balanced Advantage Fund. Units allotted: 10,204 at NAV ₹49.00. A stamp duty of 0.005% (₹25) is deducted.
2. STP Setup: Vinod also parks ₹10,00,000 in Axis Liquid Fund and sets up a weekly STP of ₹50,000 into Axis Bluechip Fund. Every week, ₹50,000 worth of Axis Liquid units are redeemed and ₹50,000 is invested in Axis Bluechip — this will run for 20 weeks.
3. Switch: Vinod wants to move his existing ₹3,00,000 from SBI Small Cap Fund to SBI Equity Hybrid Fund (both SBI AMC). Neeta processes a switch. Tax impact: the ₹3,00,000 in SBI Small Cap has grown from ₹2,00,000 — so ₹1,00,000 is long-term capital gain taxable at 12.5% (after ₹1.25 lakh exemption).
4. Partial Redemption: Vinod needs ₹2,00,000 for a family function. Neeta redeems ₹2,00,000 from HDFC Flexi Cap Fund. The money reaches Vinod's bank in 2 business days (T+2, within the T+3 limit).
Neeta informs Vinod that the switch and each STP installment are taxable events and advises him to share the transaction summary with his CA at year-end.
What Makes This Important
Frequently Asked Questions
Yes, absolutely. A switch is treated as redemption from the source scheme (triggering capital gains tax) and a fresh purchase in the target scheme. Many investors are unaware of this and get a tax shock at year-end. As a distributor, always warn clients about the tax impact before processing a switch.
🧠 Quick Quiz
4 questions to check your understanding