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Mutual Funds - Systematic transfer plans may be ideal in choppy markets
22-May-2008
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   With the game of see-saw between bulls and bears in the market unlikely to declare the winner in the near term, investors seem to be in a quandary — whether to stay invested in equities, increase exposure or make an exit to prevent further losses is the question.

   Some financial planners are of the opinion that the concept of rupee averaging — comprising systematic investment plan (SIP) and systematic transfer plan (STP) — qualifies as an antidote to this uncertainty. SIPs entail investing a particular amount every month, whereas STPs involve parking a lump sum with a debt fund, and transferring a specified amount into an equity fund at regular intervals. In effect, STPs adopt the SIP approach to investing and much more. While the SIP concept has gained popularity in the recent past, STP remains a relatively under-explored method of investing in mutual funds.

  A rupee averaging could prove to be beneficial when an investor does not want to take the entire exposure at one go. This means effectively reducing the risk to overall investment, which could be a wise strategy in volatile times. The piecemeal-investment approach is also of help when the investor is a salaried individual and cannot afford a onetime lump sum investment.

   However, if an investor is sitting on a stockpile of funds, but is unable to make up his/her mind as to how much and where to invest, given the volatility, STP could be an ideal solution. Most equity investors hesitate to buy and delay their purchases when markets are volatile. They end up losing more money waiting for corrections than in the actual correction. Even if the correction does happen, not many people have the intestinal gut to invest in such times. STP can remove subjectivity and can help the person to take one step at a time. It would certainly be a good strategy in a volatile market to average out your costs. It also saves you the anxiety of timing the market right.

   The STP route is a better alternative to parking your funds in a savings bank account or a short-term bank deposit. In an STP, the funds are parked in a floating rate or cash management fund and hence, can earn much higher returns than a savings account from which an SIP is usually done.

   However, an STP comes with its share of limitations. When you redeem your units in the debt fund to transfer them to an equity plan, you would be liable to pay a short-term capital gains tax. Lack of flexibility seems to be another drawback. SIPs are generally done when funds are available in your bank account. However, for STPs, you will have to maintain funds in respective floating rate/cash management schemes of the fund houses in whose schemes investments are to be done.

Besides, when the markets are clearly in a bullish mood, an STP may not be such a desirable route. If you have a lump sum amount at hand, it’s better to invest it at one go, as the units are likely to get costlier by the day.

   Irrespective of the market situation, however, a common man is better off opting for the SIP/STP route rather than making a lump sum investment. A disciplined approach, more often than not, is likely to yield decent returns, minus the massive shocks.

Source : www.insuremagic.com back