Which category of debt funds is advisable to set up an STP? | Value Research Dhirendra Kumar talks about the only thing to look for while parking your corpus in a debt fund for setting up an STP
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Which category of debt funds is advisable to set up an STP?

Dhirendra Kumar talks about the only thing to look for while parking your corpus in a debt fund for setting up an STP

I have a corpus of Rs 20 lakh, which I plan to invest in equity funds over the next two years. Which category of debt funds would be suitable to park the lumpsum and set up a Systematic Transfer Plan in equity funds?
- Ankit Jain

The category of debt fund that you invest in would not make much of a difference. So don't get muddled in this. A fixed amount shall be moved from debt to equity each month when you set up a Systematic Transfer Plan (STP) to move your money from debt to equity over the next 18-24 months. Thus, in the first month, your Rs 20 lakh will be invested. In the next month, it will get reduced by some amount. Gradually this fixed-income investment will get reduced to zero, and all the investments will move into equity. Even if you invest in a great debt fund that yields you about 8 per cent return or in a mediocre debt fund that produces about 6 per cent returns, it will not make a significant difference. This, as the amount invested in the debt funds will keep reducing, and the equity fund returns would be the one that matter.

I would suggest that you park your corpus in an ultra-short-term bond fund. Look at a relatively decent fund since it's tough to guess the best fund. The only factor that should matter while choosing this fund is the fund's credit quality, which means how much allocation is there to AA and below rated securities, which ideally should be very less in the portfolio. Thus, invest in an ultra-short-term bond fund and don't worry about it because even if you end up with a great fixed-income fund, it won't make a huge difference.


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