Investors are advised to put money in equity funds via systematic transfer plans (STPs). This involves putting money in a liquid or ultra short-term fund and then transferring a fixed sum to a chosen equity fund. What is the ideal tenure of an STP? We ask the experts.

Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India) Pvt. Ltd

Investors who have regular income prefer to invest their money in equities through the systematic investment plan (SIP) route, while investors having irregular income or those who have a one-time surplus, prefer the STP route of investment. The advice of investing through STP route should be similar to that of the SIP.

It provides advantage of rupee cost averaging and higher returns compared to the savings bank account. We believe the tenure of STP should be linked to the tenure or goal which the investor would like to reach. Let me explain this with an example.

For instance, if you have a goal to buy a car after five years, you could do an STP for a period of two years, assuming of course you have a good corpus or an investable surplus, to begin with.

The key for investors is to choose the tenure based on the tenure of their goal and expected rate of return. This is where the role of a financial planner or adviser becomes critical. She must provide the appropriate asset allocation and advice.

Some people take the STP route when equity markets peak out. This may backfire because you are taking a call on the market. That call could go either ways. Stick to the asset allocation based on your risk profile and invest accordingly.

Harsha Upadhyaya, chief investment officer-equity, Kotak Mahindra Asset Management Co Ltd

There is no ‘one size fits all’ suggestion. Ideally the time horizon of STP should depend on one’s risk profile, market outlook, prevailing valuations and the likely holding period of investment post completion of STP period.

If it is being used to participate in equity for a long horizon of say 10-15 years, then generally one can participate through STP over a period of 12-36 months. This helps in averaging the cost of investment and would help the investor avoid timing the market. The longer the STP period, higher is the averaging benefit.

But a minimum period of 24 months would ensure that the investor is not caught in a wrong cycle and thus, avoids investing at peak valuations. STP is not a fool proof method to avoid losses or maximise returns.

However, it definitely helps to minimise market timing risk and helps the long term investor in averaging his cost of investment over a reasonable period.

STP option is best suited when the market valuations are fair or above average, as hopefully through averaging one is able to build a portfolio through market corrections rather than at or around peak valuations.

It can also be an effective tool to tide over any possible event risks in the short term.

Anup Bansal, co-founder and managing director, Mitraz Financial Services

The approach of putting money in liquid or ultra-short-term fund and then transferring into equity funds through STP is to avoid timing the market. This is applicable primarily when markets valuations— as measured by the price-earnings (P-E) ratio—are in the expensive zone when compared with the historical values. Higher the valuation of the market, longer is the STP tenure.

For example, for market PE in the range of 24-25 times, the STP tenure could be a weekly fixed amount for 9-12 months for the targeted equity allocation whereas for market-PE greater than 25 times (current scenario), the STP tenure could be a weekly fixed amount for 15-18 months. The rationale is based on historical analysis of 1 year and 3 years’ forward returns when market is in a particular PE-zone.

The average market-PE till date is 18-20 and the probability of negative forward returns is significantly high at PE-values greater than 24 times.

So, it is prudent to take equity exposures in small chunks at high valuation. The fixed weekly STP amount may be readjusted dynamically based on changes in market valuation. This confirms to risk management where an investor does not capture the whole upside but protects the downside as much as possible.

Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd

The systematic transfer plan tenure is a judgement call, whose success or failure will only be apparent in hindsight.

An STP will be judged as a good strategy if there is a sharp correction while the STP is active. The money still in the liquid fund is protected from the fall. The earlier in the tenure the fall, the more successful the strategy.

An STP will be judged as a bad strategy in a steady bull market, like we have all witnessed recently. Here, it has prevented the money that is still in the liquid fund from participating in this market rally. The investor’s opportunity cost here is high.

By extension, a very short STP tenure retains risk because the market may correct immediately after the STP is completed. A very long STP tenure has significant opportunity cost, since the investor may miss out on a significant market rally.

Therefore, we decide on the STP tenure based on our perception of prevailing and upcoming market volatility. When we are nervous, we lengthen the STP tenure, and when we are optimistic, we trim the tenure. We are currently recommending 24-week STPs.

Given that the objective of STPs is to protect against market volatility, we always prefer a weekly STP frequency.

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