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Avoid lumpsum investments, stagger them through STPs

Investors expect volatility to accelerate in the markets on account of elections in the country, trade wars, globally, and rate hikes by the Fed.

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Investors expect volatility to accelerate in the markets on account of elections in the country, trade wars, globally, and rate hikes by the Fed. To tide over this volatility, some wealth managers recommend a staggered approach to investing in the stock markets.

How can an investor stagger his equity mutual fund investment instead of putting in a lumpsum amount?
Investors can stagger their equity mutual fund investments using the systematic transfer plan (STP) facility offered by mutual funds. To use this method, investors can put in a lump sum amount in one scheme (typically a liquid or ultra short term fund) and transfer a pre-defined amount into another scheme, typically an equity mutual fund. The scheme that is considered for lump sum investment is called the ‘source scheme’ or ‘transferor scheme’ and the scheme to which the amount is transferred is called the ‘destination scheme’ or ‘target scheme’ or ‘transferee scheme’. In most cases, investors put lump sum amounts into a liquid/ ultra short term fund and transfer it to an equity fund, over a period of six months to a year.

What type of investors can use this strategy?
Investors who have a lump sum amount and want to invest systematically in equity mutual fund schemes and simultaneously and at the same time earn a small return by investing in liquid/ultra short term schemes, use this strategy.

What are the operational aspects of an STP?
If an investor wants to invest ₹1 lakh into an equity fund using STP, he will have to first choose the liquid or ultra short term fund. The cheque should be written in the name of this fund. Once that is done, choose an equity mutual fund scheme and decide on the amount to be transferred to an equity fund along with the frequency of the transfer and set up the STP. Most fund houses have a daily, weekly or monthly option to transfer money. For example an investor can decide to transfer ₹2,500 every week to an equity fund or even something like ₹10,000 every month. If you invest offline using forms of fund houses, you will have to transfer from the debt fund to the equity fund of the same fund house. However, if you use an online portal, some of them offer the flexibility to transfer from a debt scheme of one fund house to an equity scheme of another fund house.

What advantage does STP offer?
The big benefit of investing in an equity fund using an STP is that till the time the money remains invested in a liquid/ultra short term fund, it works for the investor. This money earns a return, which is generally higher than that of a savings bank account. Secondly, STP helps in averaging out the cost by purchasing fewer units at a higher NAV and more at a lower price. Many financial planners also use this to re-balance portfolios.
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