Systematic investment plan which is popularly known as SIP is a popular investment strategy among the investors. Under this strategy, investors make a disciplined approach to investing where they can invest a regular amount every month as a long-term investment in exchange traded funds and mutual fund schemes.
In fact, SIPs are the best way to handle volatility in investments because of the rupee cost averaging advantage. However, let us discuss another strategy known as systematic transfer plan or STP which will help to achieve your financial goal in the desired target of mutual fund investment.
Mechanics and advantages
To be sure, STP is a variant of SIP that provides investors an opportunity to transfer a fixed sum at regular intervals from one scheme to another with the same asset management company. This facility helps investors to rebalance their investment portfolio by switching seamlessly between different asset classes which will reduce volatility and help to achieve the desired financial goals.
Let us take an investor who earns a lumpsum of Rs 20,00,000 through sale of a property. He could invest the entire amount in a money market or a liquid fund and then give a mandate to the fund house to transfer Rs 1,00,000 every month into an equity mutual fund over a period of next 20 months. This will help to tackle volatility and reduce the cost of acquisition.
This strategy helps investors by spreading their lumpsum investment over a particular period of time so that they do not get stuck in a fund at its peak Net Asset Value (NAV). The same STP process could be followed on the other way around, from an equity fund to a debt fund while exiting from an equity scheme upon retirement or achieving the desired financial goals.
Types of STPs
There are different types of STPs one could follow. For instance, under fixed STP, investors transfer a fixed sum from one investment fund and transfer it to another fund. In capital appreciation STP, the investors take out the profit that they have made on one investment and invest in another investment fund. In Flexi STP, investors could choose to transfer a variable amount. The fixed amount would be the minimum amount and the variable amount depends on the volatility of the market.
STP vs SIP
As discussed above, STP indeed works like a SIP mechanism where a fixed amount gets invested in a particular fund. However, if you have a lumpsum amount to invest then it is better to invest it through STP. So, it would be better to invest the lump sum in a low-risk debt fund and then schedule an STP to equity funds of your choice. However, investors should check the exit load charge imposed by the mutual fund houses if the money is withdrawn before certain specified intervals, generally one year for equity funds. However, there is no exit load on liquid funds and most STPs transfer money from a liquid fund to an equity fund without any exit load.
To conclude, STP and SIP are two different investment strategies with associated benefits and limitations. STP suits investors who have a lumpsum amount in their hand and would like to take advantage of cost averaging and volatility.
The write is a professor of finance & accounting, IIM Tiruchirappalli