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

Time and again, investment experts have emphasised that long-term wealth creation requires consistent investment over a long period of time. Investors are expected to focus on the ‘time’ period of investment instead of ‘timing’.

This means, investors are meant to stay invested for a long period of time rather than waiting for the correction to happen before a good buying opportunity arises.

Nevertheless, continuing to invest over a long period of time regardless of market cycle may not be a good idea and some tactful increase or decline in investment is recommended to capitalise on the bull or bear market, as the case may be. Something similar happens in case of flexi STPs. Let us first understand what exactly flexi STPs are.

What are STPs?

Systematic transfer plans (STPs) are a mode of systematic investment where you move a fixed sum at fixed intervals from one mutual fund scheme to another. For instance, if you have ₹one lakh invested in HDFC small cap fund and now transfer ₹5,000 every  week to HDFC Capital Builder Value Fund, it will be referred to as STP.

At the same time, flexible STPs, or flexi STPs, allow investors to keep funds in one set of funds such as debt or liquid mutual fund and transfer them into equity funds, based on some preset market triggers.

Popular trigger

However, different fund houses have used this concept in a different way. One of the popular triggers is to examine the market price of units and compare them to the cost at which they were bought and determine the amount of investment on that basis.

ALSO READ: 3 powerful mantras of investing in mutual funds: SIP, SWP and STP

For instance, when the market value of investments is more than the cost of all investments made so far, the predetermined fixed instalment amount gets invested. And when the market value is less than the cost price of investments then the amount transferred will be higher than the predetermined amount.

In effect, an investor makes lower investment when the market is trading higher and a higher investment when the market is trading lower.