By now, most
mutual fund investors have learned that systematic investment plans (SIP) are the best way to invest.
SIPs work by setting up a regular, fixed investment every month and the monthly instalment fits the income pattern that most investors have.
However, there are times when one needs to invest money in a lump sum and it does not fit the monthly pattern. On top of that, if it’s meant for the long-term and you’d like to invest in an equity fund, it can be a risky approach. As you could lose a major chunk of your money.
This is where SIP’s close cousin systematic transfer plan (
STP) can provide the solution for one-time investments. STPs allow regular transfer of money from one fund to another. So how does this make sense? It makes sense because you invest the money in a debt fund as they are predictable and non-volatile. For instance, let’s say you have received ?10 lakh which you would like to invest in an equity fund. If you invest the entire sum at one go, you would likely be exposing the entire investment to any decline in equity markets. Therefore, choose your equity fund and then, choose a shortterm debt fund from the same fund company. Invest the entire sum in the debt fund, and then instruct the fund company to transfer say, ?1 lakh into the chosen equity fund every month. In 11 or 12 instalments all your money would have shifted to the equity fund. Your buying price would be the average of that time period, thus insulating you from market fluctuations.
Of course, STPs, like SIPs, are not foolproof. This is because, there’s no way of doing away all risk when it comes to equity. However, stretching an investment over one to three years is likely to capture enough of a market cycle to significantly reduce risk. And, deciding the period depends on how significant is the sum of money in your overall assets. There’s no one rule—it all depends on what you feel is the risk.
At the end of the day, the key question that an investor has to ask is the trade-off between the risk of short-term equity market gyrations and the long-term returns that one can generate from equity.
The author is the Founder and CEO of Value Research