Mutual Funds: How does choosing the STP option help advance your investment strategy?

A Systematic Transfer Plan provides a methodical and potentially economical strategy for investing in stocks, particularly beneficial for investors aiming to manage market fluctuations and accumulate wealth over the extended term.

Abeer Ray
First Published20 Jun 2024, 01:24 PM IST
Choosing the STP option can be useful in the long run.
Choosing the STP option can be useful in the long run.

A Systematic Transfer Plan (STP) is a valuable investment tool that does not always necessitate an initial lump sum payment. Choosing STP enables you to regularly transfer a set amount at scheduled intervals (weekly, monthly, quarterly) from one mutual fund scheme (source scheme) to another (target scheme) within the same fund house.

Why use the STP option for equity investing?

The STP offers a hassle-free method for consistent investing without the need for manual transaction initiation each time. You have the flexibility to tailor your STP according to your investment objectives and risk appetite by specifying the amount, frequency, and selecting the source and target funds. Although not assured, equity funds typically offer greater return potential compared to debt funds. By incrementally boosting your exposure to equities through STP, you can potentially enhance your long-term investment outcomes.

Financial advisors advocate for using the STP option for equity investing due to several important factors:

Rupee-cost averaging: The stock market is volatile, with fluctuating prices. By consistently investing a fixed amount through STP, you purchase more units when prices are low and fewer when they are high. This strategy helps to average the cost per unit over time, offering potential benefits in equity markets prone to volatility.

Structured investing: Opting for STP instills discipline in your investment approach. By establishing a fixed amount and frequency, transfers occur automatically, reducing the urge to time the market or let emotions sway your decisions.

Incremental exposure: For novice investors or those with a conservative risk appetite, STP provides a method to slowly expand exposure to equities. Beginning with investments in a debt fund, you can gradually shift portions into an equity fund using STP. This approach aids in developing confidence in managing the inherent volatility of the stock market.

Portfolio rebalancing: As time progresses, the composition of your asset allocation—comprising various investments in your investment portfolio—can become unbalanced. For instance, if equity prices increase, their share in your portfolio may exceed your intended allocation. STP offers a strategic approach to systematically transfer funds from equities to debt funds, thereby helping you uphold your desired asset allocation.

Emotionally detached investing: Market volatility often prompts emotional reactions, causing investors to make hasty decisions such as selling during downturns. STP eliminates emotional factors by automating the investment process.

STPs don’t need a lump sum upfront, even though they are advantageous for equity investments. Any amount that you are consistently comfortable with can be used to start with this option. However, choosing the STP option can be a wise move if you have a lump sum and are afraid to invest it all at once because of market volatility. Using the STP, you can first park the lump sum in a debt fund and then progressively move it to an equity fund.

 

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First Published:20 Jun 2024, 01:24 PM IST
HomeMutual FundsMutual Funds: How does choosing the STP option help advance your investment strategy?

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