Most investors are plagued with one question, “when is the best time to invest in the market?” However, history has taught us that trying to time the markets, pick market tops and bottoms is an exercise in futility. But that does not mean that investors cannot take advantage of market declines. There is a product called a Systematic Transfer Plan (STP) that allows investors to systematically take advantage of market falls.
What is a Systematic Transfer Plan?
An STP is a plan that offers investors an opportunity to systematically transfer a predetermined amount of money from one mutual fund scheme to another mutual fund scheme. The transfer from one scheme to another is triggered by predefined market falls. The fund from which you are transferring the money is called the source scheme or transferor scheme while the fund to which the money is being transferred is called the target scheme or destination scheme. Usually, the source scheme is a low risk scheme and the destination scheme is an equity scheme.
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Benefits of an STP
A systematic transfer plan can prove to be an effective financial planning tool as it allows investors to average the cost of their equity investments by investing when prices fall.
Since investments are made into equities every time the market falls by the level predetermined by you, it ensures that you can invest in stocks at lower valuations.
By investing in the market when it falls by a predetermined amount, you are accumulating more units at lower prices. Over the long-term, this averages the cost of acquisition.
The best part is that as an investor, you do not need to constantly keep track of market levels and then determine the best time to invest. All you need to do is give a one-time mandate that specifies the amount to be transferred, the designated scheme and the trigger levels. Once this is done, the amount is systematically transferred to the designated target scheme every time a transfer is triggered.
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STP also gives investors an option to increase the transfer amount to take advantage of larger market corrections. For example, investors can choose to invest Rs 1000, Rs 2000 and Rs 3000 when markets fall by 0.5 per cent, 1 per cent and 2 per cent, respectively.
A systematic transfer plan is a unique product that allows investors to maximise the long-term benefit of equities by averaging their cost of acquisition.
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