Reasons Why STP is Better than Investing Lump Sum
Most people today use Systematic Investment Plans ( SIPs ) as a method of investment in mutual funds. Once you have grown accustomed to SIPs, and have surplus funds to invest, you could explore the option of STPs.
STP stands for Systematic Transfer Plan, which helps you to transfer a fixed amount from a particular mutual fund scheme (usually a debt fund) to another (usually an equity oriented scheme) within the same fund house. When you are setting up an STP, you are actually instructing the fund house to sell a part of your investment in a debt fund and invest the money in another scheme.
The basic idea behind an STP is to earn a little more on the lump sum amount while it is being deployed in equity-oriented schemes. Debt funds excel over the normal savings bank account in terms of return on your investments.
Depending on the lump sum amount, the investors can decide the period over which they want to deploy the money via STP. Typically, the larger the amount, the longer the time period of STP.
5 reasons Why STP is Better Than Investing Lump Sum
STP is a much better option than directly investing lump sum amounts in mutual funds. Let us see a comparison of STP vs Lumpsum here-
1. Market Risk
Investing a large amount of money in one go, in equity oriented mutual funds, can be risky. If you invest a lump sum, you could end up catching a high point of the equity markets.
If the markets fall sharply thereafter, a substantial portion of the value of your money can get eroded in the short term. STP is one of the best ways to invest and tested method of minimizing such risk and yet enjoying good returns, by regular and periodic investment, over a long horizon.
2. Better Returns
In STPs, while the money gets transferred to the Equity or Balanced funds, you get returns from the Liquid, Ultra Short Term Debt or Short Term Debt which are better than what you would have got while keeping the money in a savings account.
Also, the Liquid or Ultra short term funds have ZERO exit load and hence the monthly withdrawals also do not cost anything in exit loads.
3. Flexibility
The STP plan can be made faster, slower or stopped anytime. Here you can take help of a good investment adviser, who can advise you on the same depending on the markets i.e if they have become too expensive, cheap or in case you need money.
4. Cost Averaging
STPs will provide you with the benefits of SIP, like taking advantage of the different market situations as the market is rarely stable, it goes up and down on daily basis.
5. Rebalancing
STP helps in re-balancing the portfolio by helping an investor to switch investments from debt to equity oriented mutual funds or vice versa.
If the investment in equity-oriented schemes increases, money can be reallocated to debt funds through STP and if investment in debt goes up, money can be switched from debt to equity-oriented schemes.
Conclusion
STP route is best for all those investors who wish to invest a lump sum in mutual fund schemes because this way they get the dual benefits of comparative risk investment. Investing a large amount of money in one go in equity oriented mutual funds can be risky.
The biggest advantage of STP is Rupee Cost Averaging in buying funds with any equity exposure (Equity or Balanced funds) as it protects you from any shocks in the stock markets. Since you are buying periodically, the ups and downs of the stock markets are accounted for just as in SIP.
But, you must remember, that you can do an STP from one mutual fund (debt fund) to another fund (equity fund) if they belong to the same AMC or mutual fund house.
Also, in the case of STP, your choice is limited to the scheme of one AMC, so it is better to go with those fund houses which have many options to choose from.
Happy Investing!
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.