Best Ways to use Systematic Transfer Plan (STP) in Mutual Funds
In all mutual fund offer document or mutual fund advertisements, you see that ‘mutual funds are subject to market risk’. This line keeps many individuals away from investing. Mutual funds are exposed to a volatility of the capital market. There are many tools and techniques to counter such volatility. One such good tool is Systematic Transfer Plan (STP) in Mutual Funds. I keep telling many readers on this blog not to invets lumpsum in mutual funds, however they can invest in debt funds and do STP to equity funds. What is Systematic Transfer Plan (STP) all about? How does STP in mutual funds work? What are the best ways to use Systematic Transfer Plans (STP) in Mutual Funds?
Also Read: Best Largecap Mutual Funds to invest now in 2018
What is System Transfer Plan (STP) in Mutual Funds?
If you are already aware of STP, you can skip this section. Systematic Transfer Plan mostly termed as STP. Under STP method of investing in mutual funds, an investor transfers a fixed amount of money from one category of a fund to another in a fixed interval, generally from a debt fund to an equity fund. Systematic Transfer plan can be used as a defense mechanism in a volatile market.
What is the difference between SIP in STP in Mutual Funds?
STP should not be confused with Systematic Investment Plan (SIP). SIP is a disciplined way of investing fresh money over fixed and regular intervals whereas STP is the transfer of funds from one investment to other. This article deals with how the technique of STP can be used to maximize the returns on investments.
How does STP work exactly?
Let me explain this with an example. Mr.Rajesh want to invest Rs 1 Lakh in equity mutual funds. However, since stock markets are volatile, Mr.Rajesh is worried about investing in lumpsum. Here is what he does:
1) Invest Rs 1 Lakh in a good Debt Mutual Fund
2) Would put request for STP for Rs 10,000 per month to 1 or 2 good equity mutual funds.
3) After 1 month, his debt fund would be reduced by Rs 10,000 and principal amount would be Rs 90,000 excluding any returns from debt funds. His amount reduced from debt fund for Rs 10,000 would be invested in equity fund selected by him. Means, his total principal amount of Rs 1 Lakh would not aligned to Rs 90,000 in debt fund and Rs 10,000 in equity fund (without any returns)
4) This process would go from 1st month to 10th month and after this, debt fund value would be exhausted (except for any returns one would have got) complete amount is visible in equity fund i.e. Rs 1 Lakh (excluding any returns).
5 Best Ways to use Systematic Transfer Plan (STP) in Mutual Funds
While this process is good, one would have several doubts on what is the ideal way where one can get maximum benefit from STP in Mutual Funds. Here are few tips about this.
1) STP in Mutual Funds should be linked to Goal
It is so true that each investment should have a goal to make sure that the same is well achieved. In case of STP, if the goals are well set in terms of tenure and the amount expected it would be much easier to swap the investment based on the expected rate of return. From short-term goals like buying a new car into long-term goals like securing your retirement and health, STP can help meeting all the financial goals if invested cautiously and under the right guidance. Generally STP is used to assess that your investment in equity fund stays for long term. If STP is being done without knowing the end goal, there are likely chances that we end up with low returns than bank FDs.
2) STP in Mutual Funds should be linked to Tenure
In this regard, we can break the goals based tenure to small (less than 12 months), medium (1 year – 5 years) and long-term greater than 10 years time frame. E.g. Mr.Rajesh has invested Rs 1 Lakh in debt fund and want to do STP to equity fund. However if the objective is to do down payment for car in next 1-1.5 years, there is no point in investing through STP. Let me give another example. Mr.Kishore want to invest lumpsum in mutual funds for child education of say 8-10 years. He can invest lumpsum and do STP to equity funds for 1-2 years period and wait for 8 to 10 years.
3) STP in Mutual Funds should be linked to Risk Appetite
I feel this is one of the most important criteria, which differs from one investor to another. Do not get bogged down by what your friend does, his/ her risk appetite and goal might not be the same as yours. It is extremely important to stick to the asset allocation method and move ahead depending on your risk-taking ability. E.g. Mr.Kiran is moderate risk to low risk taker. He can invest lumpsum in debt fund and do STP to balanced funds. He should not be thinking about midcap/smallcap funds as these are high risk.
4) STP in Mutual Funds should be linked to Stock Market Direction
If the stock market are positive, means, short term would be better and negative direction means, medium to long term would be better etc. SIP is preferrrable when stock markets are positive. STP is preferable for high lumpsum investment and when stock markets are moving in negative direction.
5) STP in Mutual Funds should be linked to Volatility in Stock Markets
Volatile markets means, one should be careful and do STP for longer period. As the time frame increases, it creates a longer stretch to face the short-term volatility of the market and sooner or later the market definitely moves in the expected realistic direction. As it’s a global economy, there are many more issues, news, and factors which would increase or create stagnancy in the market. As the STP is done based on long term time horizon, the capacity to perceive the prevailing and future market increases. There should be a locking of at least 24 months in STP to give some time to yourself and your portfolio to give you expected returns.
Also Read: Top 10 Mutual Funds to invest from various sectors
Final Advise (Subject to market risks and personal risk-return criteria)
The major objective of investing in STP remains to protect the investors from market volatility, thus a fortnightly or weekly STP frequency is not a bad idea. This might differ depending on the above-mentioned five-pointers, but the basics remain the same.
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Best Ways to use Systematic Transfer Plan (STP) in Mutual Funds
l want to invest Rs. 5 Lakhs through STP. looking to the current market scenario and upcoming general elections in 2019, is it the right time to start? Also please suggest me the tenure/amount of per month invesment as also please suggest that which fund should I opt?
I have Rs. 2 Lakh accumulated in my Franklin India Bluechip Fund that I accumulated through SIP, which I stopped last year, as I moved my SIP to another large cap fund (ICICI Pru Bluechip). Now should I remove this amount entirely from here and invest in ICICI Pru Bluechip as lump-sum or how should I go about. Would it be better to invest part of the 2 Lakhs in my largecap, midcap and balanced funds?
Hello Sriganesh, Go for option no.2. Invest part of your money in largecap midcap and balanced funds
Thank you very much for the advice, Suresh. Your website is very helpful.
Need to invest 500,000 INR into funds, horizon 4-5 years at least, risk appetite moderate.
Hi CP, Since your investment horizon is 5 years, invest in balanced mutual funds. You can go for ICICI balanced fund or HDFC balanced fund or TATA Balanced mutual fund
Dear Suresh sir,
i need to invest 80000 to mutual fund through STP in the period of 3 to 5 years . my goal is to use money in contengency situation . already i have three mutual fund i.e SBI blue chip , ICICI pru value discovery and HDfC children gift fund .I neeed your suggestion.
Hi Amulya, Since your investment horizon is 5 years only, you can invest in debt funds and do STP to equity funds for say 1 year. You can invest in balanced funds as your investment period is only 5 years.
Dear suresh sir
Thanks.i already invested one balanced fund Ie HDFc children gift fund.sonis it adviseble to invest another balanced fund?
Another is shall I exist from the icici pruvalue discovery fund due to low performance and invest another fund .the returns are less compared to other equity fund .
Hi Amulya, You go ahead with another balanced fund as your investmetn tenure is only 5 years. Other fund, yes, it is in down turn, you can wait for some more time or exit
would you prefer STP from a daily dividend scheme to equity scheme for a 30% tax bracket investor.
Mani, It may not make sense to do STP on daily basis as stock market does not fluctuate high level on daily basis. You can do STP every month (like SIP)
Sir, it is not daily STP, I mean from a debt fund of daily dividend option to an equity fund on weekly/monthly basis.