4 Benefits Of Using A STP Option Smartly
Imagine you’ve won a lottery of Rs 5 lakh and decide to invest this sum into equity mutual funds. But as the markets are currently at an all time high, you realise it wouldn’t be wise to invest all your winnings in one go.
As smart investor, you can of course opt for SIPs. However, you do have another option: Systematic Transfer Plans (STPs). Under STP, a lump sum amount you invested in a fund earlier can be transferred at regular intervals systematically in a piecemeal manner into another mutual scheme (as desired by you) of the same mutual fund house.
Most fund houses have a daily, monthly, weekly, and quarterly option to transfer money. But not all offer the weekly option — only a handful of them do. Moreover, different fund houses have different requirements for the minimum amount to be invested through STP.
We all know that mutual funds are one of the most efficient means to take exposure to the equity markets. If we closely assess all the benefits of investing in mutual fund schemes, we’d realise that mutual funds actually help in reducing the overall risk to your portfolio with a professional fund management team doing the hard work for you.
In today’s dynamic market scenario, while one may aim to take advantage of the favourable weather in both equity and debt markets, there is an inherent risk involved. Thus, when taking exposure to these respective asset classes, it is important to adopt a cautious approach, and proceed smartly and prudently.
Very often while reallocating assets within categories of mutual fund schemes, investors tend to give redemption request forms, and then invest into another mutual fund scheme as they deem fit. However, STPs work the best to transfer the money systematically in such cases.
How does STP work?
In the above example, the Rs 5 lakh won in a lottery can be initially invested in an ultra-short term debt fund and/or a liquid fund taking cognisance of the fact that markets are at a high.
Then, systematically a certain sum of money lying in the liquid fund and/or ultra-short-term fund can be transferred –monthly or quarterly — to an equity-oriented fund of your choice (but ideally which can prove worthy for long-term wealth creation) over a period of time.
Benefits of STP:
- Power of Compounding
Like SIP, Systematic Transfer Plans too facilitate power of compounding.
2.Tactical asset allocation and rebalancing
Say you prefer to stay invested in liquid funds today, but going forward you also want to take a gradual exposure towards equity (as you perceive them to do well), you can certainly opt for the STP option offered by mutual funds. Likewise, if you expect the markets to undergo a corrective phase, and as a smart investor prefer to gradually disinvest from equity mutual funds, STP to a liquid fund or a ultra-short term fund can be potent tool.
- Thus, STP enables you to actively…
- ✔ Rebalance your portfolio; and
✔ Take advantage of the market scenario
- Help in financial planning
When you’re planning for any important long-term financial goals, STPs can be of great utility because it can help you to shift gradually from equity to debt when you are nearer to your financial goal deadline.
4. Rupee-cost averaging
With the strategic advantages that STPs bring, even rupee-cost averaging can facilitate reducing the risk to your portfolio.
So, instead of holding this corpus in your savings account earning around 4% interest, you could allocate it into money market and /or debt funds, i.e. liquid funds and ultra-short term debt funds, which on an average would earn you a return of approximately 7% pre-tax. But, do watch-out for the costs and tax implications.
The STP facility is best suited for investors who seek stable returns with some exposure to equity funds with an objective of wealth creation. Debt funds are ideal for capital protection and equity funds are suitable for investors looking for capital growth. Hence, a blend of different types of funds always helps to strike the balance between both asset classes.
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