Confused – Should I invest lumpsum now or through STP?

You have Rs. 50 lakhs which you want to invest in equity mutual funds. But then you see stock markets touching all time highs. You are scared, what if you invest now and the markets fall, resulting in negative returns for you?

So, you are confused if you should invest all of it lumpsum or in parts through a mechanism such as STP ( Systematic Transfer Plan)?

You reach out to various forums, blogs, websites and friends who give this advice:

“Given the markets are at all time high, do not invest lumpsum. Invest systematically over the next few months.”

“Put your money in a liquid fund and then start an STP into the equity fund for 6 to 12 months.”

You suffer from confirmation bias and feel almost convinced that this is the way to go.

Really! Why?

Why STP at all? Does it really work? Why not lumpsum?

What’s the purpose of STP in a mutual fund?

An STP is a method through which you invest a lump sum money via instalments over a period of time.

Suppose you have to invest in an equity mutual fund but you don’t want to do in one shot. So you invest the lump sum money in a liquid fund of the same fund house and then make an application to transfer a certain amount from this liquid fund to the equity fund at defined intervals such as weekly, monthly, etc.

Since markets are typically expected to be volatile, with STP you will distribute your purchase over a period of time at different market levels, hopefully.

As a result, your average purchase price of 1 unit will probably be lower than the purchase price of a lump sum investment.

As a result, you will prevent your portfolio from suffering a massive fall in case the markets were to react and go the other way. And of course, you are likely to get more units too.

Awesome!

How true is that?

Turns out, it is not. Not at least on the basis of observed behaviour.

Let’s put this method to test.

STP or Systematic Transfer Plan put to test

We took investment information of STPs actually carried out and put the numbers in an excel sheet. The summary of it is in the table below.

Note: All investments are in regular plans.

Units and values have been rounded off to zero decimals.

Current value is based on NAV of the respective funds as on June 1, 2017.

As you can see, the investments are in funds across categories including large cap, flexi cap, mid cap and a hybrid fund. So, there is no particular bias of fund type.

The STPs were done at different time periods in 2012, 2014 and 2015 over 6 to 12 months. In case of 6 months, it was a weekly STP. The others are monthly STPs.

For the purpose of caparison, it is assumed that the lump sum investment is made on the first STP date and the units of the equity fund have been calculated based on that day’s NAV.

You might point out that the liquid fund also brings in returns and is not captured here. Let us clarify that the same is adjusted automatically via the additional units of the equity fund.

So, what happened?

While the expectation was that the STP will help you get more units at a lower average price, it actually led to the opposite. You received fewer units in the equity fund with an STP as compared to the lump sum purchase.

Why did that happen? Why did you get fewer units through STP when the expectation was to get more units by taking benefit of market movements?

Quite obviously, the market did not enforce the logic that you wanted it to. You believed that the markets are at a high and they would probably come down or be very volatile and your investment would benefit from this volatility. By staggering your investment, you thought you would be able to buy more units at different price points.

The fact is markets are no one’s slave. They have their own mind or may be no mind.

The verdict is clear

It is obvious that an STP as a method of investment has failed to generate any additional value for the investor. On the contrary, it has led to a loss of profit for the investor – as high as 23.8% in the Axis Mid cap Fund.

With the STP in Franklin Prima Plus Fund, the investor has received reduced gains by almost 17%. That is his loss of profit by not investing lump sum.

The only STP that offers some solace to the investor is the one in the hybrid equity fund, HDFC Prudence. The investor is better off by 0.2% in this STP investment vis-a-vis the lump sum.

The question that deserves attention though is “was the effort for the 0.2% extra gain worth it?”

Attempts to capture market highs and lows fail. The market may not work as you intend it to. The real examples used above leave no doubt.

What is clear is that a one shot lump sum investment should be preferred over an STP. You are better off handing over the money to the fund manager as per your allocation and let him/her do the job.

Is a systematic transfer plan or STP not useful at all?

Honestly, I don’t think so. The current STP behaviour does not work for sure.

Has STP worked for you, consistently? Do share your experience.

Disclaimer: The scheme names mentioned in the post are for information and education purpose only. Please do not accept them as any form of recommendation or advice.