What is STP in Mutual funds ?
Do you want to invest a lumpsum in equities ?
STP can be used as a tool to mitigate risk. It is done by investing one time investment in debt funds and moving it to Equity funds. If the market is available at peak value, we can use this method to deploy lumpsum investment in debt market. Then transfer it to Equity fund over several months or years.
STP in Mutual funds ;
Systematic transfer Plan can be used for all types of long term equity investments to transfer the investments into safer funds after continues investments in equities.
i)Using during last stage of long term investing;
If some one has planned and investing for his child education for 10 years with a goal as 10 lacs. They can monitor continuously after 8th year and once about to reach 9th year, investments can be shifted to Safer debt funds. This protects their fund from volatility in equities.
Equity investment can be in large cap, small & mid cap or diversified mutual funds but carries the risk of losing some of your profits during the last year which is unpredictable. So by monitoring and transferring during last year protects the accumulated amount.
This can be a boon to your retirement planning as well. For example, you have been investing consistently for the last 25 years and accumulated 3 crores. If you leave as it is, the value might go down. Instead you can safeguard portion of your investment to debt funds.
ii) Maintaining single ECS account debit and investing across different equity mutual funds
If some one has planned for his equity investment across some 5 funds. He can invest in debt fund and initiate a STP into different equity funds, this will reduce the hassle of validating the ECS getting debited from our account.
Having 5 or 6 SIP’s is not difficult but by validating every month on whether the ECS has been processed or not, hence to avoid confusion one ECS can be given to debit to the liquid fund and subsequent investment in equity funds can be done by doing STP.
iii) Bulk investment;
If you are buoyant on how the market will perform during the intermittent period due to global uncertainty. It is better to invest everything in debt funds and then transfer it to equity market to reap the benefits of investing during market lows.
From the second half of 2018, market become turbulent. US and china trade war has reached new heights. Earlier there was a threat of Korea war with US. From this January we have got elections which will affect stock market to a level. All these are macro conditions at international and national level which will affect stock market.
You can create wealth as per your need. You also need to safeguard your created wealth. STP in mutual funds can help you in achieving that safety of your accumulated wealth.