Sometimes even advance stock analysis techniques and experience do not help investors predict market movements. There’s no escaping a system

Stock markets are generally unpredictable and it would be naïve to think that market experts like fund managers and stock analysts can predict the movements of the market with accuracy all the time. Sometimes advance stock analysis techniques like fundamental and technical analysis and even experience do not help investors and the markets move exactly in the opposite direction of the primary bet or the position the investor has taken. So what are the options available for investors who want to invest a lump sum but are apprehensive about the market timing and are wary to invest the entire amount at one goij Can they protect themselves against such volatile market movements and infact take advantage of itij

For an investor who has invested in the markets through a mutual fund, systematic transfer plans (STP) can be quite handy. An STP helps an investor invest in the market in a systematic and staggered manner by investing a lump sum amount in one scheme and transfer regularly a pre-defined amount into another scheme. The scheme considered for lump sum investment is called ‘source scheme’ or ‘transferor scheme’, and the scheme to which the amount is transferred is called ‘destination scheme’ or ‘target scheme’ or ‘transferee scheme’.

In most cases, investors park the lump sum amount in a liquid ultra short-term fund and transfer it to an equity balanced fund. So, in a way, STP with a scheme to scheme transfer, is an extension of a Systematic Investment Plan (SIP), which is a savings account to scheme transfer. Since the transfer from a debt scheme to an equity scheme is staggered, an investor can take advantage of rupee cost averaging. To emphasise the importance of staggered and systematic investments, consider an investor who invested an amount of Rs 10 lakhs in an equity mutual funds during the later part of last year, say November 2, 2017. After the presentation of the Union Budget on February  1 this year, the markets tanked 2.3 per cent on February 2 and this would have seen a considerable decline in the portfolio value of the investor.

On the contrary, if the investor had invested gradually over a period of 12-15 months, averaging over a year, the impact would have been less as the average cost of acquisition would be low. The longer the systematic investment period, the lesser the impact of market downturns. In addition, in an STP, an investor is still invested in debt and continues to earn returns and capital protection while the transfer to equity mutual funds continues. Rebalancing of portfolio is another important feature of an STP. Depending on the swings in either the stock markets or interest rates, an investor can transfer his funds to either debt or equities.

A Systematic Transfer Plan is of three types: Fixed STP, Capital Appreciation STP and Flex STP. In Fixed STP, the investor transfers a fixed sum of money from one mutual fund scheme to another. In Capital Appreciation STP, the investor transfers the profit part out of one investment and invests in the other. In Flex STP, the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.

To start an STP in a fund of one’s choice, the investor needs to hold units of another fund of the same fund house (AMC). For eg, to start STP in HDFC Small cap, an investor needs to hold units in any other fund like HDFC Short Term Debt. Then, the investor should decide the transfer amount and the frequency of the transfer which could be weekly, monthly or quarterly.

Suppose Raj is a small investor who has been able to save two lakh rupees and is aware that inflation will eat into his money if he leaves it in a bank. He wants his money to earn higher returns but is hesitant of investing his hard earned money at one go in any mutual fund and is unaware if this this correct time to enter the market. So, Raj can invest in a long-term (more than five years) STP plan for investing his two lakh rupees lump sum. This is how he can proceed:

i) Invest one lakh rupees in two different source debt funds.

ii) Set STP for Rs 1,000/week to the respective destination equity funds

iii) He can have the option of transferring Rs 2,000 everytime market falls by more than one per cent.

Through this process, in about two years time, Raj’s entire investment will be transferred to growth oriented equity funds, all the while taking advantage of rupee cost averaging, buying more mutual fund units when there is a downturn in the market.

A Systematic Transfer Plan is particularly suitable to investors who have lump sum money and wish to invest in equity funds but are wary of timing the market. They can then choose to park the money in a liquid or debt fund and use the STP option to systematically transfer a fixed amount of money at regular intervals into the target equity fund.

(The writer is Assistant Professor,Amity University)