STP most effective tool for good returns in volatile market for mutual fund investors.

Let’s understand about STP.

How Mutual Fund Systematic Transfer Plan help invest in volatile markets.

 In volatile markets, investors often face the dilemma of whether to invest or to wait for the prices to fall further. While investing at market bottoms undoubtedly yields higher returns it is almost impossible to time the market. The year-to-date Sensex chart below will show the challenges in trying to time the market. You can see that Sensex made multiple bottoms from which it rebounded only to correct again later. Such market conditions are often confusing for average retail investors.

What are Systematic Transfer Plans?

Mutual Fund STP essentially is a mechanism to transfer funds systematically from one mutual fund scheme to another. You can use STP to invest your lump sums in equity mutual funds in a systematic manner in volatile market conditions, by investing a low-risk debt mutual fund scheme like a liquid fund and transferring fixed amounts at regular intervals (weekly, fortnightly, monthly etc.) to the equity mutual fund scheme of your choice over a specified period of time (e.g., 3 months, 6 months, 12 months etc.).

 

How Systematic Transfer Plans work?

Let us assume you have Rs 10 lakh of lump sum money which you want to invest in an equity mutual fund. However, you are unsure about the price at which to buy the equity fund units due to volatility in the market. Let us now assume that we expect volatility to last for 3 – 6 months more. You can invest your lump sum funds in a liquid fund and transfer equal amounts to equity fund at monthly intervals over your chosen STP tenure, say 6 months. So every month Rs 1.67 lakhs will get transferred from your liquid scheme (through redemption at the prevailing NAVs) to equity scheme – units of the equity schemes will be purchased at prevailing NAVs. If NAV of equity scheme keeps falling, with every STP instalment you will be buying a higher number of equity scheme units. Also, since your liquid fund will increase in value over time, you will redeem lesser and lesser number of units of liquid fund units for your STP to equity fund. The twin benefits of Rupee Cost Averaging and Liquid Fund returns during the STP tenure will boost your returns in the long term.

Advantages of Systematic Transfer Plans

• By investing at regular intervals, you will be buying at different price points. In a volatile market, you are likely to buy at lower prices, thereby reducing the average cost of purchase.
• Mutual Fund Systematic Transfer Plan (STP) does not require you to time the market. You do not have to follow the daily market movement, support and resistance levels, analyze macro-economic data, company news etc. Once you setup an STP, you will benefit through Rupee Cost Averaging as long as volatility persists.

 

• STP will provide stability and liquidity to your portfolio because your equity exposure will increase gradually.

 

• You will earn returns from your liquid or debt fund investment throughout the STP tenure. This will also boost your returns in the long term.

 

• You can stop your STP at any time and switch your balance liquid / debt fund units to your equity fund if you think uptrend has resumed.

Illustration of financial benefit of STP

We will illustrate with an actual market example. Let us assume that we go back in time to December end 2015. From its high (made earlier in that year) the market (Sensex) had fallen 13% by the year end. 12 – 15% correction often provides attractive investment opportunities, but investors were concerned about continuing volatility due to falling crude prices and fears of global recession.

Let us assume you wanted to invest Rs 10 lakh through monthly STP (Rs 1.67 lakhs / month) over the next 6 months from 1^st January 2016. You invested your money in S&P BSE Liquid Rate Index (proxy for liquid fund) and transferred equal amounts every month (beginning 1^st January 2016) to BSE Sensex Total Return Index (proxy for equity fund) over the next 6 months till June 2016. The table below shows, your debt and equity investment values for each STP transaction.

STP (Rs 1.67 lakhs /month for 6 months), you still have around Rs 41,500 balance in S&P BSE Liquid Rate Index. This is essentially, the income generated by the liquid fund during the STP tenure. Since the Sensex was rising continuously for the last 3 months (from March 2016 onwards) you would have felt confident about the uptrend and switched the liquid rate index investment balance to Sensex. At the end of the STP tenure and switch of balance liquid scheme units to equity, you would have accumulated 29.52 units of Sensex TRI.

Let us compare investment growth different lump sum investment scenarios versus the STP till date (as on 1^st August 2019). You can see that through STP you made Rs 1.1 to 1.5 lakhs higher profits. This shows how STP is beneficial in volatile market conditions.

low lets understand. 

STP vs SIP

While both STP and SIP involve regular investments in equity mutual funds, in SIP the money comes from your bank account while in the case of STP, it gets transferred from your debt fund.

Also, STPs offer higher returns than SIPs, since you are also getting returns from your debt fund. Debt funds do not have a very robust rate of returns like equity funds, but they generate decent returns of around 10 percent and are also safe from market fluctuation. In the case of STP, you get the benefit of debt fund returns. In the case of SIP, the bank account offers an almost negligible interest rate, so you do not get that benefit.

Thirdly, SIPs are usually open-ended. There is no defined time frame for investment. you can invest for as long as you want and withdraw whenever you like. This is not the case for STPs. In this, the amount, as well as the time period of transfers, are fixed. You have to choose the tenure for which you want the transfer to happen, say 6 months, on a monthly basis, then after 6 months, the transfers to your destination equity fund will stop.

The taxation is also very different in the case of SIP and STP. In the case of STP, every transfer from debt fund to equity fund is considered a redemption in the debt fund and hence you will be subjected to short-term capital gains tax. This is not the case in SIP.

In SIP, you will have to pay long-term capital gains tax and short-term capital gains tax depending on the tenure you hold your funds for.

STP is the best way of investing the lump sum in equity funds, especially during a volatile market environment. You not only get returns from the equity fund, but the contribution of the debt fund is also pretty decent. However, if you do not have a massive corpus, SIP can be a better investment strategy for you.

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