Investors who invest from their regular incomes usually opt for SIPs. But lump-sum investors are often advised so that they invest their money in an STP before transferring it to an equity fund. This necessarily means parking your money temporarily in a short term fund or a liquid fund before transferring it to a mutual fund.
But how long do you stay invested in an STP? The answer is quite confusing as there is no agreement among financial advisors or any formula about the ideal period to stay in an STP.
Since there is no scientific approach to the problem, the best way is to decide the tenure based on your risk appetite, purposes, expected rate of return etc. But it is important that we do not try to time the market as it is very risky.
An ideal plan would be to spread your money over a period of 12 months. This is a good strategy to follow when the markets are expensive. Thinning out your investment over a year will present you with many opportunities and sufficient time.
If you have only a modest amount, you can choose to span your investments for just six months. But if you have a large amount of money to invest, it is best that you spread it out over a year or two or perhaps longer, if possible. This way, you can also make extra investments when the market is low.Staying invested in an STP for at least a year will ensure that you do not get caught in the wrong market cycle. An investment ranging over a period of three years will enjoy a good portion of any market cycle. It will also help the investor in averaging the investment cost.
When the investor is choosing the tenure based on their goals and risk capacity, the role of the financial advisor is crucial. They must guide well and provide suitable asset allocation.
Some people choose STP when the equity market is peaking out and this is generally advised against as it could backfire. A better call would be to stick to the allocated portfolio and invest in view of that.
STPs are a bad tactic during steady bull markets as the money in liquid funds cannot participate in the market. A very short STP contains risk as the market may suddenly change after the STP is completed. A very long STP will not be beneficial since the investor can miss out some good market cycles.
Therefore, the tenure of a STP depends on the upcoming market volatility.When the market seems too volatile, it is best to lengthen the tenure as STPs can protect us from some falls. When the market seems promising, we trim the tenure so that the money can play in higher grounds and yield better income.
STPs are also effective shelters to tide over possible short term risks in the market. However, they are best appropriate when market valuations are fair or above average.
