Thinking of Lumpsum investments in mutual funds: What about STP

Imagine you have got an annual bonus of Rs 8 Lakhs and decided to invest the entire sum into equity mutual funds. However, looking at the current market level which is almost at an all-time high, you may feel unsure to invest the entire bonus amount in one go.

You can take a smart decision and opt for Systematic Investment Plan (SIPs) or go with Systematic Transfer Plans (STPs).

What are the advantages of Systematic Transfer Plans (STPs)? Systematic Transfer Plan (STP) is a mechanism by which an investor is able to transfer a fixed or variable amount from one mutual fund scheme to another mutual fund scheme.For example - An investor can park a lump sum amount in a liquid fund that can be transferred in a staggered manner into another scheme, say an equity fund of the same mutual fund house (AMC) at regular intervals.

The systematic transfer frequency from one fund to the other can be on a daily, weekly, fortnightly, monthly or quarterly basis depending on the option offered by the AMC. There is a minimum fixed amount that needs to be transferred on these frequencies.

Investors who are investing for their long term financial goals like, retirement, children education etc. and at the same time, are concerned about market volatility, they can invest their capital in a low risk debt or money market (e.g. liquid or ultra-short term funds) and use STP to transfer a fixed amount from liquid or ultra-short term funds to equity mutual funds on a regular basis over a period of time suitable to them. On the other hand, if the investors are nearing their financial goals and are worried that markets may be volatile or get into correction when they need the fund, they can transfer a fixed amount from their equity mutual fund scheme to liquid or ultra-short term funds via STP.

STP is a proven way that an investor can take to invest in mutual funds to get the maximum exposure to the equity markets while minimizing the risk. Needless to mention you also get the expertise of a professional fund manager who helps you to get the best return on your investments.

In today’s dynamic equity market scenario, there is an inherent risk involved when taking an advantage of the favorable weather in both equity and debt markets. Therefore, it is advisable to be cautious when taking exposure to these respective assets classes and proceed smartly and prudently. The idea should be to balance between these two assets while minimizing overall risk. The method of STP investing helps you achieve this very easily.

By reading this how STPs can be a useful mechanism to manage asset allocation, you can learn more.

How does mutual fund STP work?

With STP, investors can maintain a balance of risk and return by splitting the investment amount over a period of time. One of the benefits of STP is that during volatile market the investors can invest systematically in equity mutual funds and earn risk free returns by investing in liquid or ultra- short term mutual fund schemes.

Therefore, in your case you can invest your bonus amount of Rs.8 Lakhs as lump sum in a liquid or ultra-short term fund, and then transfer a fixed amount at an interval decided by you to an equity or balanced fund (fund selection should be based on your risk taking ability).

Let us see how STP actually works – We have taken an example of Rs 8 Lakhs invested in a liquid fundon 1st January 2013 and started weekly STP of Rs 10,000 to an equity fund. The STP is still continuing. The above STP is generating an annualized return of 15.45% ! Please check the results yourself to believe this.

Benefits of Mutual Fund STP

Power of Compounding

Investors also get to compound their wealth and allow it to grow substantially with the help of power of compounding over a long period of time via Systematic Transfer Plans (STP).

Tactical asset allocation and rebalancing

You can change funds as and when you like with STP. For instance, if you have invested in a liquid fund but you perceive the equity to do well and want to take a gradual exposure towards equity then, STP will help you in doing so. On the other hand, if you expect the markets to undergo a corrective phase, and take a decision to gradually disinvest from equity mutual funds, as a smart investor would prefer, again STP can act as potent tool to transfer to the liquid fund from the equity fund.

Learn more about asset allocation and market cycles

Mostly, it is seen that investors give redemption request forms, while reallocating assets within categories of mutual fund schemes, and then invest into another mutual fund scheme as they deem fit. Instead investors can choose STPs that is considered as the best mode to transfer the money systematically in such cases.

Therefore, an investor can re-balance the portfolio by switching investments from debt to equity or vice versa with the help of STP.

Therefore, STP enables you:

• Take advantage of the market scenario


• Rebalance your portfolio

In this context you may like to read how STPs can provide volatility defence and portfolio management

You can also read simple asset allocation strategies for different risk profiles

Help in financial planning

If you are planning for any important long-term financial goals then STPs can be of great utility to help you create a long term corpus in equities while taking minimal risk and rupee cost averaging. Thereafter, transfer back gradually from equities to debt when you are nearing your long term financial goals.

Disciplined investment

While there will be some judgement involved in your STP investments, financial experts feet that, plan based disciplined investing gives better results than investments made on gut feel or tips or ups and lows of the market levels. As disciplined investing also takes emotions out of the investment process, it helps you remain objective. You should not discontinue or break your STP because of market movements in the short term as it may end up harming your long term investment returns.

For example - You have initiated a 6 months STP from a liquid fund to equity mutual fund. You find that markets are rising post you have started the STP to equity fund, you should not break your STP just because the market rises or falls sharply in a month. STP is a defence mechanism against volatility. Breaking your STP based on sharp stock market movements either ways is trying to time the market which is nearly impossible.Therefore, we can say that the primary objective of an STP is to preclude the need of market timing.

Apart from STP what are the other 10 things you should do in volatile markets

Protection of profit

Sometimes a harsh bear market or crash can wipe out the profits accumulated by investors over the years. This can be very disappointing for investors as it may jeopardize their long term financial plan. A capital appreciation STP can help investors protect their profits by transferring capital appreciation in one scheme (e.g. equity mutual fund) to a low risk scheme (e.g. liquid fund). A capital appreciation STP helps the investors reduce their overall mutual fund portfolio risk, without changing the asset allocation.

Please check how the Profit Transfer STP plan works

Conclusion:

Mutual Fund Systematic Transfer Plan (STP) can be seen as an extension of SIP. In the case of SIPs you can invest in a mutual fund scheme with as low an amount as Rs.500. However, in STP, an investor gets an option to invest a lump sum amount in any debt mutual fund scheme and at periodic interval, can transfer a fixed or variable sum into an equity mutual scheme or any scheme of choice.

An investor who seeks stable returns while taking some exposure to equity or equity oriented mutual funds with an objective of wealth creation can opt for STP facility.