For smart investors, STP’s the next step

For smart investors, STP’s the next step
10 Sep, 2007, 0443 hrs IST,Barun Chakraborty, TNN

Over the past one month, equity investors across the globe have seen their fortune swing back and forth. Concerns over subprime lending, yen-carry trade and the looming spectre of a US slowdown not only battered global equity markets, but also raised doubts among several retail investors on the course of the markets in the short- to- medium-term.

In India too, investors have had a tough time given the kind of gyrations the markets have been witnessing.

The Sensex has seen several major corrections since it touched its life-high of 15,868 on July 24 this year, and after dropping to 14,000-levels it bounced back to 15,600-levels.

A retail investor is likely to remain confused as to whether it is the right time to enter the markets? Should one expect some more corrections? Unfortunately, no one can predict the course of the market. For a retail investor, timing the entry or exit is a difficult act to follow. The best way to survive a volatile market is to keep investing in equities and stay put with a long-term horizon.

SIP (Systematic Investment Plan)

For mutual fund investors, the systematic investment plans (SIPs) are the best method to stay invested without bothering too much about the market ups and downs. Through regular investing, one gets to invest in the highs as well as the lows. This helps in averaging out the market volatility. The investor keeps investing a certain amount (as small as Rs 50) at regular intervals. As the market soars, even the value of the investment scales new highs. And when the market tanks, the value of the mutual fund units —the net asset value (NAV) — too comes down. This means more units for the same SIP amount.

Apart from inculcating the discipline to invest regularly, the fact that the investor has to stay invested for at least two years in a fund to free his/her investment in one-year SIP from capital gains tax, gives enough time for the money to stay put in the market and appreciate.

STP (Systematic Transfer Plan) Edge

The SIP is the best route to invest with regular cash flows. But what if someone has a huge corpus and plans to invest in equities and at the same time is worried about the prevailing uncertainty in the market? Still, the systematic investment route remains the best vehicle to move ahead.

The gains could be enhanced by opting for a systematic transfer plan (STP) along with the SIP. STP allows one to make periodic transfers from one fund into another.

In an SIP, an investor typically parks the money in a bank savings account and a certain amount is transferred at a regular interval from the savings account to the fund house for buying into a specified equity fund.

In the case of an STP, the lumpsum is invested in a liquid or a floating short-term plan and is transferred at regular interval to a specified equity fund. For example, one has Rs 60,000 to invest in equities, he can put the entire amount in a liquid plan and go for a monthly SIP of Rs 5,000 in an equity plan through a systematic transfer.

However, the limitation of this investment process is its inability to invest in different fund houses. So, if you have an equity fund to invest through the SIP mode, you would have to choose the liquid fund of the same fund house. But with little difference in returns among different liquid funds and its almost risk-free status, STP is still a better bet.

While an investor earns only around 3.5% pa interest on the amount parked in the savings account, a liquid fund gives a higher return of 5-7% pa on the corpus with the same level of liquidity. As these funds invest in safe and liquid debt instruments, the level of risk remains very low.