With the Nifty scaling the 19,500-mark, an all-time high, many individuals may be a bit apprehensive about putting fresh money into equity-related investments. Experts suggest individuals should avoid investing lumpsum and instead stagger their investments through systematic transfer plans (STPs) through mutual funds.
As the indices across market caps are trading marginally above long-term average valuations, the probability of a substantial near-term loss is reduced in case of STP as investors get the benefit of averaging. It enables a disciplined and planned transfer of a fixed amount between two mutual fund schemes —from a low-risk option, such as a debt fund to a higher-yielding equity fund. So, investors who are wary of short-term volatility can consider making investments in a staggered manner, which can help to mitigate the impact of any market volatility.
Susmit Misra, chief business officer, Equentis Private Wealth, says as it is impossible to time the markets, it is always a prudent practice to stagger investments over a period of 3 – 12 months depending on the investor’s overall risk tolerance and market conditions. “Given the current market conditions we recommend that investors stagger their investments over a six-month time frame through weekly/monthly STPs,” he says.
In STP, an investor is automating, investing and staggering at the same time. Santosh Joseph, founder and managing partner, Refolio Investments, says if the markets were to go lower, the
subsequent STPs will start buying out more units for the same amount of money and the investment will average out. “An STP is a non-emotional, rational method to access, participate and stay invested in the market.”
How to set up STPs
The way to set up an STP is to do a lumpsum investment in a low-risk fixed income instrument such as overnight fund, liquid fund, or money market fund. Then, from there a fixed amount is moved into equity funds at a fixed interval such as weekly, monthly or quarterly. This approach helps the investor to invest over a period and not invest all their funds in one go when the market is at its peak. However, investors must take into account the capital gains arising out of exits from the liquid/debt funds and the exit load that some of the debt funds may charge.
George Thomas, fund manager, Equity, Quantum AMC, says investors may park their excess money in liquid funds where yields are attractive compared to savings accounts. “They can transfer the money to equity in a staggered manner over the next few months. Given the strong corporate earnings cycle, investors would be better off by maintaining their equity allocation in line with long-term asset allocation plans,” he says.
While the market is at an all-time high, it is not that easy for investors to decide on investment decisions. Harshad Chetanwala, co-founder, MyWealthGrowth.com, says STPs help the investors to average their cost of investing in equity funds and at the same time help in building the corpus gradually. “Another important thing about STP is since the money is already invested in the debt funds, the possibility of it getting used at the investor’s end is very rare. This also makes investing more disciplined as the money is already set for investing.”
Flexibility for investors
In STPs, investors have the flexibility for the transfer frequency and amount. Asset management companies offer various types of STPs —fixed, flexible and capital appreciation. In a fixed scheme, a predefined amount fixed by the investor is transferred. In a flexible scheme, an investor can transfer different amounts from the source fund to the target fund and in capital appreciation, only the capital appreciated or the returns is transferred from source to the destination fund.
STPs help the investors in managing risks effectively and investors can potentially achieve better portfolio performance and build wealth over time. The investments can be made in a disciplined manner and will not be impacted by any short term market fluctuations. “The gradual diversification of portfolios —from low risk assets to assets with higher risk profiles— should be regularly monitored so that overall asset allocation is in line with the risk profile of the investors,” says Misra.
STAGGERED PURCHASES
- Stagger your equity investments over a six-month time-frame through STPs
- Transfer a fixed amount from a low-risk debt fund to a higher-yielding equity fund
- Take into account the capital gains arising out of exits from the debt funds and the exit load that may be charged