I want to invest Rs 50,000 in mutual funds for about two years with an objective of capital appreciation. Please explain systematic transfer plan and the best funds for it -Sid
21-Mar-2007 •Research Desk
I want to invest Rs 50,000 in mutual funds for about two years with an objective of capital appreciation. I am apprehensive of high level of Sensex. I have heard about systematic transfer plan (STP) in mutual funds. Kindly, tell me clearly about STP and the best funds for it
An STP is simply a mode to transfer your money from one fund to another at pre-defined intervals. Commonly, investors park a lump sum amount in a debt fund, from where a regular amount is transferred at periodic intervals (monthly or quarterly) into the specific equity-oriented funds. For example, an investor may invest Rs 1 lakh in a debt fund and opt for an STP of Rs 10,000 on the first of every month for the next ten months in an equity fund.
It is similar to the drip investing concept of an SIP, the only difference being that money flows from one fund to another in case of an STP instead of being transferred from your bank account. This eliminates the risks associated with timing the market in case of lump sum investments and in turn offers the benefit of rupee cost averaging. In your case you can invest Rs. 50,000 in a short term debt fund and institute a STP of Rs 5,000 per month across two equity or balanced funds over a ten month period. But bear in mind that investment horizon of two years is a little too short for equity investments. Usually, it is recommended to have a time horizon of at least three years in mind while making equity investment, since markets can be very volatile over shorter durations. Therefore, be prepared to assume a high degree of risk which comes with such a short investment horizon.