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Personal Finance November 7, 2017

SIP Vs. Systematic Transfer Plan (STP)

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It is now an established fact that investing in capital market can earn you higher returns. But there is not a single best way to plan your investments in shares or bonds. With every passing day, placing funds in this lucrative segment is becoming all the way easier and affordable. Perhaps the most preferred way opted by most retail investors is systematic investment plans where one invests a fixed amount of money monthly in the mutual fund scheme on offer by a fund manager.

Also read: Why Mutual Funds, And Which One

SIPs empower investors by enabling them to steer clear of formalities involved in purchasing and selling shares and bonds as they can simply transfer some of their holdings in equity or debt oriented or hybrid (a mixture of both) scheme by fixing periodical installments. The plus here is one can even opt for a monthly contribution of INR 500 in SIPs and this at times also becomes a major hindrance for someone who wishes to place a bulk amount in the capital market. This bulk amount can accrue from various sources, for say when someone liquidates her holding in property market or in cases when the employer or a regulatory agency like EPFO clears dues like bonus or arrears or provident fund.

At a time when most investors are aware of the bullish trend in global stock markets and the returns the bourses have on offer, they can either go with purchasing stocks directly from the secondary market in the dematerialized form or can contemplate using the systematic transfer plan route. Here, in contrast to SIPs, one can place a lump sum in one of the schemes offered by the fund manager and then move money from the existing scheme to another on a weekly, monthly or quarterly basis.

For those looking to tap the equity market, this works in the following way. You can place money in a less risky debt-oriented scheme and then instruct the fund manager to activate STP. This instruction mandates the manager to transfer a fixed amount of money from the existing debt scheme to an equity scheme in a phased manner. To illustrate, you can invest the entire INR 10 lakh you received from EPFO in debt instrument and have INR 1 lakh moved toward an equity-linked scheme of the same mutual fund every month. This way your entire money will make it to a scheme that can earn you more profit (although with some risk that accompanies equity investment) as compared to bonds which have fixed returns.

The rationale here is stock markets are infamous for their volatility and the economic and political uncertainties facing India as well as other countries only exacerbate this. Rather than losing a major chunk of money placed in shares of some large or mid-cap companies due to a sudden shock or correction in the market, it is wiser to gradually shift your money in an equity-oriented scheme and stock it as it is for a few years depending on your future needs. However, putting money in debt oriented schemes is not relatively risky, but of course, it also yields a lower return. Thus, putting your bulk money in debt oriented schemes and gradually transferring it to equity-oriented schemes will average out your risk that comes along with investing in equity.

Also read: Investment Advice for Millennials of India

Disclaimer – The views or opinions expressed in the article are the personal opinions of the author and do not in any way reflect the views of Suvipra. Suvipra does not assume any responsibility or liability for the same.

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