Diwali has ended. So are the celebrations. But you have another reason to celebrate apart from a long weekend. Festivals are the time where gifts are exchanged and Diwali, in particular, is a festival where money is gifted either in the form of a bonus from office or a gift from the family. If not both, then you certainly got lucky at the game night on Diwali. So basically it’s the festival where there are windfall gains. So the real reason to celebrate is when this money can help you get rich and that can happen through investing in mutual funds.
I’m sure you must’ve certainly heard about investing in mutual funds through SIP is beneficial. But does that mean you will invest the amount you received as a bonus or gift in installments through SIP, well no! There is no reason to keep the money sitting idle in a bank when you can invest the same through lump sum right now and later do an STP (Systematic Transfer Plan) for the same.
An STP is the Systematic Transfer Plan where there is a regular transfer of money from another fund instead of your bank account. Instead of keeping the money in a bank you invest in a debt fund which has the potential to earn higher returns than a savings bank account. Debt funds are less volatile and highly predictable and relatively give stable returns.
How an STP works?
All you have to do is to choose a short-term debt fund to invest. Then you have to choose an equity fund to do an STP. The short-term debt fund and equity fund have to be under the same fund house for the STP to work. Then you can instruct the fund house to transfer the amount from the debt fund to equity fund over a period of 12 months. This way you are averaging out your costs just like how you do in a SIP while earning a return on the rest of the rest of the money too.
Benefits of STP
Just like a SIP (Systematic Investment Plan) STP also has benefits too.
Power of Compounding: You can earn return consistently even while you transfer the money from one fund to another.
Re-balancing: STP allows you to transfer money from debt to equity or equity to debt as and when needed. It has the flexibility to re-balance your portfolio based on the market scenario and your expectations about the market.
Financial Planning: Goal-based investing is a very popular tool for mutual funds. And for long-term investing equity is recommended. STP can be of great use when in-between financial goals you want to invest a lump sum amount to reach your financial goal earlier or with a higher amount. You can also shift money from equity to debt as and when you reach the deadline of your goal.
Rupee cost averaging: Since the investment in spread over a period of time, the average cost of investing comes down, just like SIP.
How to decide on the time frame of an STP
There is no hard and fast rule when it comes to deciding the time-frame of an STP. If it’s a bonus then a few months, say 6 is enough for an STP. But if its proceeds from the sale of any asset which are huge then 3-5 years is recommended. It all depends on your risk appetite and the lump sum amount available.
There is risk everywhere even in STP. It is not foolproof just like SIP. A market crash will certainly bring you a loss. STP doesn’t eliminate risks, it just reduces them. There is evidence from the past that stretching an investment over a period of time (say 3-5 years) will capture the market cycle enough to reduce risks but nothing can eliminate risks.
So this Diwali you have another chance to become rich and earn those extra bucks with STP.