Do you have a corpus ready to be invested? It could be arrears in salary, a bonus, an endowment, a profit from a successful business deal, or a matured investment. Letting the corpus lie in a bank account or investing it in an FD may not be the smartest solution. Whatever the source of the corpus, it must be put back to work in an asset class that will offer you good returns.

Why invest?

The goals of investments are to save and earn returns that could finance a future need. Every investment in a specific asset class should be aligned with a future goal. These goals could be short-term or long-term and require investment tenure and maturity to align with them. Experienced investors are well-versed with this and ensure that every investment is made with a purpose. For instance, money set aside for an emergency fund should not be put into the equity market. It requires a safe asset class where the corpus can be liquified within 48 hours in times of an emergency. Similarly, a young investor with a long-term investment horizon may not meet his goals by investing solely in safe fixed investments like an FD or RD.

Savings is key

While this statement holds true, the varied asset classes and investment avenues in the financial market often deter investors from beginning their financial investment journey. Volatility is another deterrent that often pushes investors away from the equity market. As the now-famous quote of D-street goes, ‘Risk Hai Toh Ishq Hai’, risk here is the underlying requisite for gains on any investment. The lower the risk, the lower the returns and vice versa. Time in the market is the third reason investors often lose out on gains. They are either inconsistent, begin late, or try to time the market, all three being the top reasons for major money pitfalls.

Consistency – Where time in the market beats volatility.

Consistency is the name of the game in the financial world. Consistent investments in suitable asset classes can beat volatility, kick in the effects of compounding, bring along the benefits of rupee cost averaging and help you achieve your set financial goals. Investors who often lack knowledge and discipline in investing are asked to consider the Systematic Investment Plan (SIP) route to investing in the equity market. SIPs ensure the investor sets aside a predefined amount at fixed intervals invested in the mutual fund scheme of your choice. It brings discipline to your investment journey. A staggered investment route ensures you gain from price fluctuations, thus beating the effects of volatility.

Lumpsum investments

Although in your case, a SIP would not be the best solution as it would require you to keep the corpus in your bank account while each month’s installment is taken from it. Additionally, investing your complete corpus in equity at a specific time could be risky in case of a dip in the markets. Could there be another way to gain the benefits of both a lumpsum investment and a SIP route?

Here is where a Systematic Transfer Plan (STP) could come in handy. How does it work?

SIPs are a systematic way of transferring a specified amount each month from your bank account into a mutual fund of your choice. STPs, on the other hand, offer you a fund-to-fund transfer. Here you have the opportunity to invest a corpus in a fund of a specific fund house. This fund is typically a debt fund or any other ultra-short-term fund that can be easily liquified. You can then set standing instructions for your money to be transferred from this fund to an equity fund in the same fund house under STP. Beware, both the funds need to be part of the same fund house and cannot be transferred from one fund house to another.
What do you stand to gain?

Your benefits are:

  1. Your investment in the short-term debt fund will offer you gains on the invested corpus.
  2. Compounding kicks in when your gains from the Debt or short-term investment are later shifted to be reinvested in an equity fund.
  3. Staggered investments in equity funds offer the same benefits as SIPs: discipline in investing, compounding, rupee-cost averaging, and beating volatility.
  4. Switching seamlessly between asset classes at fixed intervals within a fund house lets you rebalance your portfolio seamlessly to achieve a suitable asset allocation in your portfolio.

STPs are a viable investment strategy for investors with a sizeable lump sum corpus ready to be invested. They benefit from their investment in debt funds, which help protect their capital and offer reasonable gains while blending a mix of equity investments in a staggered manner offers capital growth.

Hence, ‘To STP or not to STP?’ will depend on your corpus, risk appetite, money goals, and investment horizon.