BackIf you have a lump sum to invest in equities, opt for STP
It allows you to move money from one scheme to another in the same fund house at periodic intervals
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How does a systematic transfer plan (STP) work? Who should opt for such a plan?
—Jamini
STPs enable investors to move money from one scheme in a fund house to another scheme in the same fund house at periodic intervals. These are very similar to systematic investment plans (SIPs), except the source of money for the scheme getting systematic inflows is not a bank account, but another scheme from the same fund house. STPs are typically set up between liquid funds and equity funds, where the flow is from the liquid fund to equity funds. The reverse is done when booking profits or exiting a market-linked product. STPs can be set up at daily, weekly, fortnightly, or monthly intervals in most schemes.
Investors should consider STPs when they have a lump sum that they would like to invest in an equity fund. Since it is better to employ cost averaging to enter into the market rather than make a one-time investment (which would mean taking risk with market timing), the lump sum can be placed in a liquid fund and moved systematically to the equity fund over many instalments.
I just have equity and gold funds. I would like to put my money into a debt fund, too, to diversify. I would like the returns to be similar to that of bank fixed deposits (FD). What kind of debt fund should I buy?
—A. Sircar
The mutual fund product that is closest in terms of its characteristics to a bank fixed deposit is a fixed maturity plan (FMP). These are closed-end funds that are redeemable only at the end of their term. Since they invest in debt securities with a similar tenor and hold the portfolio till maturity, investors can hope to gets returns broadly in line with the interest rates of the securities prevalent at the time of their investment. This makes them somewhat similar to FDs. However, as mutual funds, they will enjoy indexation benefits from the taxation perspective when the investment term is longer than a year.
However, it is difficult to exit an FMP mid-way, o investors requiring interim liquidity should stay away..
If you need both liquidity and debt market returns close to FDs, you can consider short-term funds if your time frame is one to two years (a typical time-frame for retail FDs). A fund such as Pine Bridge India Short Term Income is good choice in this regard.
Queries and views at mintmoney@livemint.com
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