STP or Systematic Transfer Plan is similar to an SIP (Systematic Investment Plan) except for the fact that it involves transfer of money from one fund category to another on a regular basis. Usually, such a type of transfer takes place from a debt fund to an equity fund in installments in order to facilitate the averaging out of the overall purchase price. Recently, the domestic market has become riskier due to the weakening Rupee as well as the inflated crude oil prices. This not only has created immense pressure on India's growth scenario but also on the investor community owing to high market volatility. Given the high dependence of the economy on crude oil (Brent) to meet the energy requirements of the country, the inched up prices are a serious cause of concern since this will also lead to a rise in import bills and subsequent widening of trade deficit. It sure is a huge challenge for the central bank as much as it is for investors. Therefore, this condition needs to be taken into consideration by old as well as new investors before they dive into any kind of investments in equity related instruments.
Now why does STP hold relevance in the current market situation? Let's find out.
RBI's decision to keep the repo rate unchanged also worries many investors. If an investor is thinking about investing in mutual funds, careful analysis of which would be a better route of investment – STP or lump sum, is necessary. The current level of market uncertainty advocates against going for lump sum option. The primary reason being, lump sum investing requires appropriate timing of the market which is a complex exercise. Under volatile market conditions, one must not get involved in timing the market unnecessarily and it would make more sense to stay disciplined with investing.
Additionally, it would be sensible for investors to thoroughly assess their risk appetite and tolerance in order to be sure of which route to take. When investors wish to invest a huge lump sum amount in equity funds, financial advisors recommend opting for the STP route as it provides protection to the lump sum amount from market gyrations. This could be beneficial to investors as equity funds are readily impacted by market performance which in turn could even affect the money invested. The gradual averaging of the purchase cost of equity fund comes to the rescue in event of a falling market leading to generation of more number of units for the same price. There are different categories of STP available – Fixed STP, Capital appreciation STP and Flexi STP to suit different investors based on their requirements. Fixed STP allows for the transfer of a fixed sum from debt mutual fund to equity mutual fund. In case of capital appreciation STP, only the gains acquired on the debt mutual fund are essentially transferred whereas the Flexi STP option is the most dynamic one in which the sum transferred depends on the level of market volatility.
As per experts, parking the lump sum amount in a low risk debt mutual fund and then switching to an equity mutual fund via STP upon market recovery would be an ideal way to go about mutual fund investment in the current market scenario.
Apart from the above advice, it is good to follow some set rules to make things better and convenient in the investing arena. Individual investment goals, risk appetite, investment horizon, targeted asset allocation and individual financial requirements in general are some important parameters to look at before taking any investment decision. A clear investment objective helps investors maintain discipline and stay on the right track. Investors must zero in on how much time they are required to spend with the market in order to accomplish their goals. This will help them to analyze their risk profile and stay committed to goal based investing instead of getting distracted by market ups and downs. Targeted asset allocation should never be skipped as this can make or break investments since a major portion of return on investment is determined by asset allocation. In case of a lump sum investment, the entire sum is at stake all at once with no capital protection. Therefore, it is advisable to strive for a well diversified portfolio with the optimum mix of debt and equity as well as appropriately diversified across multiple fund categories and fund houses. A smart investor is expected to keep all the above stated guidelines in mind for efficient investment decisions.