A systematic transfer plan (STP) is an automated way of shifting money between mutual funds. The process allows you to transfer a fixed amount of money between two funds belonging to the same asset management company and is often used to mitigate timing risk. Most investors want to buy low and sell high, to reap large profits. But as with most things in finance, low and high are relative terms when it comes to the market. To overcome this ambiguity, flex STP was introduced, which allows investors to take advantage of market volatility and transfer money between asset classes based on set triggers. Investors most commonly choose to move their money from debt funds to equity funds as the former provides an assurance in the short term while the latter is more suitable for growth in the long term.

Benefits of flex STP

1. Rupee cost averaging: By iteratively transferring your money between funds, you make up for the fluctuation of prices in the market. Flex STP helps you utilise rupee cost averaging to your advantage by ensuring that the average costs incurred while making purchases is lowered. This can be essential to realising the full potential of your capital. Investing in a lump sum could cause you to incur significant losses if the market plunges. 
2. Expect higher returns: As mentioned earlier, investing through flex STP allows you to take full advantage of market swings by using triggers to decide when to move your money. This  could include Price to Earnings (P/E) of Nifty 50 or Sensex, a drop in value of your own investment or some other preset formula that allows you to mitigate losses. In most cases, the fund houses set the trigger while the investor provides a predefined amount. To understand this more clearly; let’s say the investor wants to set the STP to a minimum of INR 10,000. Fund houses have different rules to define the triggers. In this case, let’s assume that if the PE ratio is more than 15, the fund house will initiate STP for the same amount. However, in case it’s less than 15, the STP will be twice or thrice the predefined amount.
3. Optimises risk for stable returns: While we had previously said that investors most commonly move money from debt funds to equity funds when they are looking for growth, even the reverse is true. During times of high volatility in the stock market, investors can transfer their funds through an STP into relatively safer investment schemes such as debt funds and money market instruments. This allows them to optimally balance the risks they are taking, while at the same time earning stable returns on their investment.

Taxation of STP

Just as important as the benefits of using flex STP is understanding its taxation. Since each transfer is considered to be a fresh investment, you will be able to claim tax deductions under section 80C of the Income Tax Act. However in the event that capital gains are incurred during a transfer, it will be subjected to tax. In the case of equity funds, transfers within 12 months of purchase will be taxed under the short term capital gains (STCG) tax at 15%, while transfers after 1 year above INR 1 lakh will be taxed as long term capital gains (LTCG) at 10%; LTCG below INR 1 lakh are exempt from taxes. For debt funds, transfers within 36 months of purchase will be taxed according to your slab and transfers beyond this are taxed at 20% after giving you the benefit of indexation. 

So keeping these points in mind, you can start using flex STP to your advantage. Make sure to consult your financial advisor before deciding what funds to invest in, and being aware about the triggers set by the fund house.