Why should you consider STP strategy in the current time?
Written on Saturday, November 17, 2018
By Mitali Sharma
‘Mutual fund investments are subject to market volatility.’ Is this keeping you away from investing in mutual funds? If your risk appetite is low and you are looking for any tool or technique that can counter the market volatility to an extent, then one good tool is Systematic Transfer Plan (STP).
You must be aware that in mutual funds there are equity funds and debt funds. Equity funds are for those investors who have a high-risk appetite, whereas debt funds are comparatively subject to a lower degree of risks thus mostly preferred by investors with low-risk appetite. However, the irony of the situation is that in mutual fund investments usually ‘Higher the Risks- Higher the Returns.’ Even though equity funds are subject to a higher degree of risks but at the same time they have better potential to generate returns, compared, to debt funds. So, when you think of wealth creation, equity funds are a better choice, but again at the cost of the risks involved. So, how to tackle this situation? This is where STP comes into play.
Mr Sharma is handy with Rs 2 Lakh that he wishes to invest in equity mutual funds. But market volatility is making him apprehensive about investing in a lump sum. He gets to know about Systematic Transfer Plan, and here is what he does:
1) He invests his Rs 2 Lakh in a Debt Mutual Fund
2) He requests for a Rs 10,000 per month STP to one or two equity mutual funds schemes.
3) After 1 month, from his principal amount of Rs. 2 Lakh, invested in a debt fund, Rs 10,000 would get deducted and transferred to his selected equity fund through STP. The principal amount would be reduced to Rs 1, 90,000.
4) This process would continue from 1st month to 20th month and after this, his debt fund value would get exhausted, excluding the returns the fund has attracted. The whole of his principal amount, excluding returns would get visible in the selected equity funds.
Benefits of STP:
Power of Compounding: Like SIP, Systematic Transfer Plans too facilitate the power of compounding. You earn interest consistently even while you transfer money from one fund to another.
Tactical Asset Allocation and Re-balancing: It gives you the flexibility to re-balance your portfolio as & when needed. Say you prefer to stay invested in liquid funds today, but going forward you also want to take a gradual exposure towards equity (as you perceive them to do well), you can certainly opt for the STP option offered by mutual funds.
Rupee-cost averaging: With the strategic advantages that STPs bring, even rupee-cost averaging can facilitate reducing the risk to your portfolio.
Helps You Take Advantage of the Market Scenario: If you expect the markets to undergo a corrective phase, and as a smart investor prefer to gradually disinvest from equity mutual funds and STP your investment to a debt fund.