Topic 4 of 10~5 min read

Types of Transactions — Purchase, Redemption, Switch, STP

Definition

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.

In Simple Words

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.

Real-Life Scenario

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.

Key Points to Remember

Purchase (Subscription): lumpsum or SIP — units allotted at applicable NAV based on cut-off time; stamp duty of 0.005% applies

Redemption: full or partial (by amount or by units) — equity funds settle within T+3, liquid funds within T+1

Switch: redemption of source scheme + purchase of target scheme within the SAME AMC — two transactions, two tax events

STP: automated periodic switch — each installment is a separate transaction with separate tax implications

Redemption proceeds are always credited to the registered bank account — no third-party payments allowed

ELSS funds have a mandatory 3-year lock-in from the date of each installment — no premature redemption

Exit load (if applicable) is deducted from redemption proceeds and credited back to the scheme, not the AMC

For switch transactions, the total holding period restarts in the target scheme — critical for tax planning

Frequently Asked Questions

Test Your Knowledge

4 questions to check your understanding

Question 1 of 4Score: 0/0

A switch transaction in mutual funds involves:

Summary Notes

Four transaction types: Purchase, Redemption, Switch, STP — each has distinct NAV applicability, settlement, and tax rules

Switch = redemption + purchase within same AMC — TWO tax events; holding period resets in target scheme

Redemption timelines: equity T+3, debt T+2, liquid/overnight T+1 business days

Each STP/SIP installment is a separate transaction for tax purposes — each has its own holding period

ELSS: 3-year lock-in per installment (not per folio) — no premature redemption, switch, or pledge allowed