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How Systematic Transfer Plan can help you make money

You may have heard about SIP but do you know what STP is? We explain...

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SIP (Systematic Investment Plan) for Mutual Funds is a well known jargon, but SWP or STP -- Systematic Withdrawal Plan/Systematic Transfer Plan -- are the lesser known terms, even for investors. 

Let's quickly gloss through what SIP is. It's not a scheme but rather a mode of investment in mutual fund schemes on a monthly basis. It replaces the old recurring deposits (RD) method quite well. 

SIP gives the benefit of rupee-cost averaging which provides the benefit of handling volatility in the stock market. With SIP, you invest a fixed amount of money say Rs 5,000 to 50,000 (for example) every month. On the other hand, with STP, you invest large amounts of money to be spread over the long term into the equity funds.

Let’s break it down

STP is one of the best investment strategies, similar to SIP, as it helps you keep a check on the market volatility. Under this strategy, your investment will be transferred from the asset class over a period of time.

Let’s say you want to invest Rs 25 lakh as a lump sum into mutual funds. You'll have two choices -- either you can invest the entire Rs 25 lakh in one go in a couple of mutual funds schemes or you can invest via STP route i.e. invest this money in debt (liquid) funds and then transfer it to the equity funds over a period of next three to six months.

First of all you will need to select a couple of good equity and debt funds/ schemes from a couple of good fund houses. Let’s assume that you would like to invest this Rs 25 lakh in five different schemes (i.e. Rs 5 lakh in each scheme) from SBI Bluechip fund/ Mirae Emerging Bluechip/ DSP Focus 25/ Kotak Select Focus/ ICICI Value Discovery. 

Under STP, rather than investing all your money in one go, you can select debt/ liquid funds schemes of these selected AMCs (i.e. Mutual funds companies). STP will let you invest over the next few months.

If you pick SBI’s savings scheme, a liquid fund, and from there switch your investment to SBI Bluechip fund, an equity scheme, your Rs 5 lakh investment in SBI Savings fund will be invested all at one go and from there you can either opt for a daily or weekly transfer option of switching it to equity scheme. 

Assume that you would like to spread this investment over the next five months i.e. 100 Trading days in the market (i.e. 5 weekly trading days * 4 weeks * 5 months) with a daily STP. Then Rs 5 lakh will be divided equally in 100 days which comes to around Rs 5,000 daily. This means, out of the Rs 5 lakh invested in SBI savings i.e a liquid fund, every day Rs 5,000 will get transferred to SBI Bluechip fund. The process will be similarly followed with other funds too, for their funds. 

Why STP is important and when will STP really work? 

STP also helps you do rupee-cost averaging and generate higher returns, specially when the markets are very volatile and you're not particularly in the mood to risk your money.

Let’s take an example of an investor with Rs 25 lakh who invested a lump sum in equity fund between December 2007 to January 2008. In the next 3 - 4 months, the investor would have cut this to Rs 15 lakh because of the market crash. Had the investor taken the STP route of over 6 - 12 months, he would have lost only one tenth of his investments.

This gives a fair idea about the advantage of the STP investment route. Investors often enter the market during its peaks and exit at its lows. During the good times i.e. a bullish phase, investments are mostly made in shares that are overpriced. Since everyone else is buying, investors fall prey to herd mentality and become optimists. During a bearish phase, investors tend to sell rather than buying and forget that the market moves in cycles, and good years are followed by bad. So overall, it is too difficult and practically impossible to time the market. It's because of this reason, investing your money gradually i.e. at regular intervals can help you immensely

When will STP not work?

STP will not work in case the markets are already at the bottom of a bearish run, and when there is a strong possibility of them reviving upwards. In a scenario like this one, the STP route would give results similar to SIP, and investing at one go will make more sense.

Being a retail investor, you may not have the time to research or study market technicals, so it's recommended to never invest a lump sum in a volatile market. The worst risk may be to take a cut on the profit you may have made if the market goes up after investing in MFs but then too it would be better to settle for a cut in profit by 5 to 6% as it would save you from a huge downside if the market behaves differently than what you had expected.

The second scenario where STP would not be for you, would be if you don't have a sizeable amount to invest. Then SIP would be better than STP because investing smaller amounts in debt funds and then transferring it to equity will make you liable for capital gains tax. 

How to select the STP period?

Uou can do an STP for a couple of months to years but as there is no one-size-fits-all rule. Each investor will need to go over his/ her overall investment strategy to plan their STPs but the option of 5 - 6 months is always good, and you may select that to optimise your investments.

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