How To Utilise Lump Sum Investment Via STPs In Volatile Markets?
If you wish to invest via lump sum in a mutual fund scheme, you must consider opting for the Systematic Transfer Plan (STP) option. Systematic transfer plans help you transfer funds from one mutual fund scheme to another seamlessly. What’s more, they also help you avoid risk in volatile market conditions.
What is an STP in mutual funds?
A systematic transfer plan helps you transfer your funds from one mutual fund scheme to another periodically and conveniently. You can take advantage of this option to minimise your portfolio’s overall risk and consistently grow your returns.
What are the features of STP?
Here are the key features of systematic transfer plans:
- Securities and Exchange Board of India (SEBI) mandates no minimum investment amount. However, most companies require a minimum investment amount of ₹1,000.
- Typically, at least six transfers are required.
- No entry load is charged but an exit load may be applicable on the transfer depending on the debt scheme terms.
Benefits of making a lump sum investment via STP during a volatile market
There are several benefits of investing via lump sum in a mutual fund scheme by opting for the STP option:
- You can earn higher returns by investing via STP: With an STP, you can transfer a lump sum from a less volatile scheme (such as a debt fund) to a more growth-oriented scheme (such as equity funds) in a phased manner. This helps you take advantage of market fluctuations and potentially earn higher returns over time without trying to time the market.
- You can transfer funds to safer investment schemes in volatile market conditions: In uncertain market conditions, STPs allow you to systematically transfer funds from higher-risk investments (such as equity) to safer options like debt funds. This helps stabilise your portfolio and reduce risk when the market is volatile, safeguarding your capital.
- You can benefit from rupee-cost averaging: Similar to Systematic Investment Plans (SIPs), STPs allow you to spread out your investments, enabling you to buy more mutual fund units when prices are low and fewer units when prices are high. This averages out the purchase price and mitigates the impact of market volatility.
- STP helps you benefit from the right mix of equity and debt: If your current mutual fund portfolio has a high concentration of equity mutual funds – which means that it is exposed to higher risk – you can opt for the STP option and invest in debt funds to balance the overall risk posed to your portfolio. Portfolio rebalancing is one of the key benefits of the STP option which helps investors minimise risk and consistently increase their overall returns.
In conclusion
Choosing the STP option helps you benefit from a variety of key features offered by STPs – rupee-cost averaging, the option of mitigating overall risk, and the ability to park your investible income in safer avenues during volatile market conditions.