Mutual Funds: How to utilise lump sum investment via STP in volatile markets?

Investors with lump sum amounts during market highs are usually faced with the dilemma of how to time their investments. They can consider using the simple yet effective option of Systematic Transfer Plans (STPs) in mutual funds. STP allows for a disciplined transfer of funds from a debt-oriented scheme like a liquid fund to an equity fund, all within the same fund house. This strategy can help mitigate the impact of market volatility and take advantage of the power of compounding.

What is an STP?

A systematic transfer plan enables investors to transfer their funds from one scheme to another, periodically and seamlessly, without any hassles. This transfer can help investors gain market advantage by moving their investments to securities that offer higher returns. It protects investors' interests during market fluctuations, minimising potential losses.

Also Read: What are flexible STPs and how do they adapt to the changing market conditions?

Types of STP

STPs can be of three primary types:

1. Flexible STP: Investors can decide the amount to be transferred based on market volatility and predictions about scheme performance.

2. Fixed STP: The total amount to be transferred remains fixed, as decided by the investor.

3. Capital STP: This type transfers the total gains from market appreciation to another scheme with high growth potential.

Features of an STP

· No minimum investment amount mandated by SEBI, but most companies require a minimum instalment of Rs. 1,000.

· A minimum of six transfers is usually required.

· No entry load but exit load may be applicable on transfer depending on the debt scheme terms (liquid funds charge exit load within 7 days).

Also Read: 3 powerful mantras of investing in mutual funds: SIP, SWP and STP

Benefits of an STP

1. Higher Returns: STPs allow investors to earn higher returns by shifting to more profitable ventures during market swings.

2. Stability: During market volatility, investors can transfer funds to safer investment schemes like debt funds, ensuring stable returns.

3. Rupee Cost Averaging: Helps lower average costs by investing in funds when their average price is low and selling when their market value increases.

4. Optimal Balance: Creates a portfolio with a mix of equity and debt instruments, balancing risk and returns.

5. Taxability: Transfers are subject to tax deductions if capital gains are incurred.

Who should invest in an STP?

STPs are ideal for individuals with lumpsum investment amounts like annual bonus or inheritance or proceeds from property sale etc. and seeking high returns in the stock market over the long term. They are also suitable for those wanting to reinvest in safer securities during market instability.

Key things to remember

· STP is a long-term investment strategy; high returns are not instantaneous.

· Investors should understand and learn about market trends and patterns.

· Exit load and tax deductions should be considered when calculating returns.

· Market risks can only be spread over time not eliminated with STPs.

Also Read: STPs vs SIPs: Which is the better investment strategy in current market scenario

In conclusion, systematic transfer plans offer a strategic approach for investors to manage their investments during periods of market volatility. By utilising STPs, investors can stagger their investments over time, taking advantage of market fluctuations and potentially reducing the impact of market volatility on their portfolio.

STPs provide a disciplined method for transferring funds from a debt-oriented scheme to an equity fund, allowing investors to benefit from the potential upside of equity investments while mitigating the risks associated with market volatility. Additionally, STPs can help investors take advantage of the power of compounding and rupee cost averaging, ultimately leading to potentially higher returns over the long term.

However, it's essential for investors to consider their investment goals, risk tolerance, and market conditions before utilising STPs. While STPs can offer benefits such as stability, optimal balance, and higher returns, they also come with certain risks and complexities that investors should be aware of.

Overall, STPs can be a valuable tool for investors seeking to navigate market volatility and achieve their long-term financial goals. By understanding how STPs work and how they can fit into their overall investment strategy, investors can make informed decisions to help build a more resilient and successful investment portfolio.

Vivek Goel, Co-founder and Joint Managing Director at Tailwind Financial Services