Stock markets CRASHING? No problem. Try STP

Current stock market volatility is making investors wary. There is no clear direction as to how markets will pan out over the next couple of months. In such times, a staggered approach to investing can be a good option.

If you are an investor looking to invest a lump sum amount in equity markets, systematic transfer plan (STP) can be a better option in volatile times like we have been witnessing in recent times to invest money in staggered manner.

What is systematic transfer plan (STP)

STP refers to a method of investing where an investor invests a lump sum amount in one scheme and regularly transfers (switches) a pre-defined amount into another scheme.

Every month on a specified date an amount you choose is transferred from one mutual fund scheme to another of your choice.

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Courtesy: Investment-mantra.in

How STP works

Under the systematic investment plan, the investor typically has a lump sum amount to invest. Considering that investing in equities at one go could be risky, one could choose to park the funds in highly liquid and cost efficient debt funds such as liquid plus/floating rate fund, and on a regular basis, transfer a stipulated amount into equity funds.

For example, an investor makes initial investment of Rs 60,000 in a debt fund and starts a monthly STP of Rs 10,000 per month into an equity-diversified scheme.

The table alongside signifies how the amount invested per month will be transferred from one mutual fund scheme (debt fund) to another mutual fund scheme (equity fund).

The scheme from which the transfer takes place is called the 'source scheme' and the scheme into which funds are transferred is called the 'target scheme'.

Investors can choose a specific date and the required frequency (daily, weekly, monthly, or quarterly). Apart from filling the common application form for the debt fund, one has to fill the systematic transfer plan as well which would instruct the mutual fund house to transfer the stipulated amount on a particular date, frequency and for the specified period as chosen.

Fund houses usually mention a minimum investment amount in the target scheme for investors to avail the STP facility; they also mention the minimum installments of transfer for STPs which is typically 6 to 12 installments.

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When STP can be effective

STP will make sense when markets are very volatile and you as an investor don't want to take risk with your money by investing it in one go. If you invest through STP in markets and markets fall or have lots of volatile moves, then this situation will be better than the one time investment option.

This is also better than putting money in a bank and doing a SIP, because at least you money is earning relatively better returns on debt part in STP.

When STP may not prove effective

In case markets have started making an up move, in that case STP will not deliver the best returns like SIP, one time investment is a good choice in that case. But then one can never predict when markets will again start to go up.

Given that a retail investor does not have all the tools and time to research the markets, it's not advisable to invest lump sum in any case.

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Four advantages of STP

1. No Hassles while investing

The STP mode of investment saves the time and effort involved in giving multiple instructions to the mutual fund to redeem from one scheme and invest in another and converts it into a single instruction, to be executed over the defined period.

2. Better returns as compared to savings bank account

An investor can earn a better return as compared to returns from a savings bank account, from liquid funds or short-term bond funds that are used as 'source scheme'.

3. Aids in portfolio rebalancing

STP can work both ways: debt funds to equity fund and vice versa. So when you as an investor want to reduce the exposure to equities, you can start a STP from an equity fund to a debt fund.

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Useful option at time of withdrawals

A systematic transfer plan can come in handy when instead of withdrawing the money systematically from your equity MF scheme you transfer it systematically to a debt scheme or a money market scheme of the mutual fund house.

This way, you automatically invest your money (in a debt fund) while still removing it from the share market. Once all the money is transferred from the equity MF scheme to the debt / money market scheme, you can withdraw it and use it to achieve your financial goal.

Conclusion

STP is a useful tool to take a step-by-step exposure into equities or to reduce exposure over a period of time.

Investors should consider this option as to move their money between investment options -- one is not withdrawing money completely, but is just moving it between two investments which are usually in different asset classes (for example, equity and debt MFs).

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