As volatility in markets likely to be high because of geopolitical tensions, investors with lumpsum should consider systematic transfer plans (STPs) in mutual funds for higher returns. They can stagger investments from a debt-oriented scheme like a liquid fund to an equity fund with the same fund house.

Such a strategy will enable a disciplined and planned transfer of a fixed amount between two mutual fund schemes and can help to mitigate the impact of any market volatility. As the money is automatically adjusted between the selected funds, investors can de-risk the market timing and benefit from the power of compounding.

In fact, STPs help in averaging out the investment purchase price and are extremely beneficial in volatile periods when markets are highly uncertain. Moreover, as the objective of a debt fund is to beat the savings interest rate, any outperformance will provide superior STP returns.

Stagger your investments

Dhaval Kapadia, head of products, Ambit Wealth, says it may be advisable for investors with lumpsum to stagger investments into equity markets via STPs over the next six to nine months. “In this way, investors would be able to take advantage of any interim volatility or corrections in the market and average their cost of investment. And as markets recover post the culmination of these events, investors would stand to make better returns.”

Similarly, Harshad Chetanwala, co-founder, MyWealthGrowth. com, says during uncertain times it is better to follow a staggered manner as it could help an investor in taking advantage of volatility in the stock market.  “Investing in one go at this stage is not advisable. However, one can look at 30 to 40% of investment in lump sum and the rest can be invested through STP mode.

Higher returns from STPs

The difference is the returns offered by savings bank accounts and liquid funds can make the difference. Usually, liquid funds can help you generate a bit higher returns than a bank account and this can help an investor to generate higher returns. Liquid and ultra short term debt funds, which typically invest in debt instruments maturing within one to six months, are offering annualised yields in the range of 7-7.5%.

Given the low average maturities of the debt holdings of such funds and superior credit quality, the impact of any fluctuation in interest rates would be minimal. “In case of systematic investment plans where the lumpsum is parked in a savings bank account, the interest rate on such accounts is typically around 4% per annum, which is 3-3.5% lower than the yield on liquid/ultra short term debt funds. Hence, investing into equity funds via STPs offer better returns as compared to SIPs,” says Kapadia

What to keep in mind

Few things should be kept in mind while investing through STPs. Even though investments through systematic transfer plans ensure exposure to lower market risks, it cannot be entirely eliminated. Gaurav Goel, a Sebi registered investment advisor, says investors should have a good understanding of the market trends. “Since funds are transferred within schemes of the same asset management company, it is possible that all funds are not managed equally well. Investors should also keep in mind the exit loads of each scheme.”

Abhishek Banerjee, founder and CEO, Lotusdew Wealth & Investment Advisors, says, “In STPs, settlement cycles are longer than moving cash and the net of tax returns, compounded with more complex capital statements, make it an unattractive option for most cases.” Every STP should be based on the objective and hence the time horizon of such investments should be goal-oriented. The ideal way to plan the STP is to calculate the monthly investment based on the overall corpus needed. 

“STP from debt to equity can be for the long term where the investor keeps transferring the money in debt Funds regularly. It could also be for a shorter period where someone would have a surplus amount in debt and would like to invest it in other funds over a period,” says Chetanwala.