Invest through STP, not lump sum

Rajat is in the business of rice.  This month has been good for him. He received a payment for orders made earlier. He  also completed surplus orders. He made a heavy profit. Rajat wants to invest this money in an equity mutual fund so that the money doesn’t get spent elsewhere. But, he is in a dilemma. Whether it would be right to invest a large amount at once? Or should he invest some amount now and some amount later? But, he  fears that if he invests intermittently, ten somewhere in the middle, the money may be spent for some other work. Also, there is no certainty about the market’s movement. So let’s try and remove Rajat’s worry.

Investors like Rajat should invest a lump sum amount through Systematic Transfer Plan, i.e. STP. In this, the entire money is not invested directly in an equity fund at once. First, the entire money is invested in a liquid fund, such as a debt fund.  After that, it is gradually transferred to an equity mutual fund through STP in pieces.

The scheme in which the lump sum amount is first deposited is called the source scheme. The scheme to which funds are transferre is called the target scheme. STP transfers the deposited amount from one scheme of a mutual fund to its other scheme in a disciplined manner. Most people keep transferring money from a debt scheme to an equity scheme for a fixed period.

Its duration is usually between 6 months to 2 years. Investors also have the option to choose how many times they want to transfer the amount, weekly, monthly, quarterly or any other option.

STPs are actually like Systematic Investment Plans or SIPs of a mutual fund.  The only difference is that under STP, money is transferred from one scheme to another scheme, whereas in SIPs, money goes from the investor’s bank account to the fund house.

There is no entry load when you invest through STPs. This means you don’t have to pay any investment fees. However, when you sell units, an exit load of up to 2% of the investment value is levied.  A mutual fund investor must transfer funds to the target scheme at least 6 times, and there is no maximum limit for transfers.

Under STP, when you transfer funds, it is considered an exit from the source scheme, i.e. redemption, and a purchase of units in the target scheme. Therefore, every time you transfer funds, you have to pay short-term capital gains  or long-term capital gains tax on the capital gain on the units of the source scheme. This depends on the type of your source scheme, such as equity-oriented or debt-oriented.

STP saves you from the risk of investing a large amount at once and also protects you from market fluctuations. Moneyfront CEO Mohit Gang says that if you have a large amount for investment, then STP is a better option in mutual funds for volatile markets. In terms of returns, STP is better than lump sum investment. When investing through STP, you get returns from the source scheme, i.e. where you invest lump sum, and when the money goes to the target scheme, you also get returns from there.

If Rahul has 2 lakh rupees and invests it in an equity fund at once, then at Rs 100 per unit, 2,000 units will be accumulated in one year. At NAV of 113, the value of his investment will be Rs 2.26 lakh.

Now let’s see how much return Rahul would have got had he invested same amount in STP.

Suppose, Rahul invests Rs 2 lakh in a liquid fund at once with a monthly transfer of  Rs 16,667 to an equity fund . After transferring 16,667 rupees for 12 months, we assume that the amount left in the liquid fund would generate an annual return of 8%.
On the other hand, when 16,667 rupees is deposited in an equity fund. There units will keep getting added.  If 2,055 units are accumulated in one year. Then, the value of his investment at the end of the year would be Rs 2,32,173. In addition, the value of his investment in the liquid fund would  be Rs 7,718.

This way, at the end of the year, the total value of their investment would be Rs 2,39,891. It is clear that with the help of STP, Rahul earned an additional 13,891 rupees. So this STP strategy is right for investors who want to invest a lump sum amount in market fluctuations. If you do not want to invest lump sum but want to invest small amounts every month, then SIP is right for you.