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How systematic transfer plans or STPs provide a single solution for benefiting from market uncertainty, Shyamali Basu explains
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Indian markets have been on a roll, with both benchmark indices (Sensex and Nifty 50) rallying to all-time highs on global cues, expectation of a good monsoon, inflows from mutual funds and foreign institutional investors. At the same time, uncertainty looms on account of US monetary policy and implications of GST – so, timing the markets may seem perilous for investors.
A question that investors ask is: How to ride the market boom? Investing the money in equity mutual funds may seem an attractive proposition. However, lump sum investments may expose investors to risk of incorrectly timing the markets. And waiting indefinitely for the right opportunity to enter the market could result in losing out on valuable returns.
Systematic transfer plans (STPs) offer the perfect solution to this quandary. So, what are STPs? The STPs allow investors to invest a lump sum amount in a source scheme and transfer a pre-defined amount regularly to a target scheme. Typically, liquid or ultra-short-term funds are used as source schemes and equity/balanced funds are preferred as target scheme choices. However, STPs can also be used to systematically reduce equity exposure, especially when markets appear to have peaked.
* STPs allow a disciplined approach of staggering investments into equity funds, especially wheninvestors has a large investible sums.
* STPs defend against market volatility as cost of investments is averaged over the period of investment
* Hassle-free change in asset allocation from debt to equity and vice versa.
* Source fund continues to generate returns.
* Removes emotional bias from the decision-making process.
When To Invest in STPs
Following are few instances, where STPs could solve your investment quandary:
* Sale proceeds of property.
* Bonus salary received at year end.
* Large investment in fixed deposits/saving accounts needing a shift in allocation to equities.
STPs Versus SIPs
* STPs and systematic investment plans (SIPs) serve different investment purposes.
* STPs cater to investors with lump sum funds at their disposal, who intend to stagger investments in equity markets, to avoid timing the market.
* SIPs are suitable for investors who have a steady stream of inflows, a portion of which may be invested in equities in a disciplined manner.
Why This Works
Use of STPs in a staggered manner is one of the best investment strategies for retail investors looking to invest a lump sum amount. It enables the investors to capitalise on the market boom and at the same time it mitigates the risk of capital erosion due to unfavourable market timing. However, investors can reap the benefits of STPs only if they follow the strategy consistently. Discontinuation of STPs on account of short-term movement may prove detrimental to the financial planning of investors. In view of individual nature of financial goals, risk profile and tax status, it is advisable to consult a financial advisor before taking investment decisions.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.