STP – The Unsung Hero Of Systematic Investing in Mutual Funds

With all other investment options giving lower returns compared to Equities, everybody wants a pie of the growing Mutual Funds industry and high past returns of Equities.

Systematic Investment Plan (SIP) has become the preferred route for investors to enter in Equities thru Mutual Funds. SIP is great for investors who are salaried OR have a monthly income from their profession as it acts as auto saving mechanism as soon as the monthly income hits the account.

For investors, who do not have a monthly income and have dynamic income, are often confused what to do with the idle money at their disposal.

Monthly SIP is not suited for them as the income is not predictable. They may not get any income for the next 3 months and then get a lumpsum. This problem is mainly faced by professions like Lawyers, Architects and Surgeons who do not have a predictable income flow.

They are scared to invest lumpsum in a volatile asset class and also would like to part with the money together. They end up doing a 36 month SIP of a monthly amount from their savings account. The problem with this arrangement as that the money waiting to be invested in the 2nd and 3rd year is earning Savings account.

Systematic Transfer Plan (STP) is one option which is best suited for above types of irregular income flow.

In a STP, the lumpsum money is invested first in a Liquid/ultra short term debt fund which earns a return of money market instruments. Then a STP instruction is given which transfers a fixed amount from Debt Fund to Equity Fund for a fixed tenure on a monthly basis eg. 12 months OR 36 months.
In other words, STP is a SIP from a Debt Fund.

STP gives enough liquidity and also reduces risk of investing Lumpsum investments in Equity. Till the whole amount is transferred over the tenure, there is an option to redeem the money from the liquid fund without exit load.

Considering the expensive nature of Equity Markets, STP is one of the best ways to play volatility over the next 12-18 mths. There are also variations available from a Fixed Sum STP to variable sum STP namely Flex STP offered by some Mutual Fund companies. This basically increases the amount of transfer automatically, if the market falls which accelerates the cost averaging further to increase the returns.

In Summary, if you have a lumpsum amount, opt for a Systematic Transfer Plan to play volatility and enjoy liquidity with higher returns from a blend of debt and equity funds.

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