Loss is painful, specially if it happens immediately after you invest. That’s why you choose an STP or Systematic Transfer Plan to take exposure to equity funds. The confusion is what is the ideal tenure for STP? Here is a guideline you can use.
Suppose you have lumpsum money to invest and you are keen to deploy it into equity via mutual funds. However, the market valuations and the current volatility make you very uncomfortable with making all the investment in equity right away.
“What if the markets go down immediately after I invest?”
No investor likes to see the markets going down immediately after they have invested. Your investment suffers and it makes you look like a fool. With an STP, you can work to avoid this painful feeling.
An STP or a systematic transfer plan is a method to invest money over time into equity funds. This is very popular in a market situation where the valuations don’t appear right and present a risk of a near term loss, even though notional.
The confusion now is for how long should your STP run for? 6 weeks, 6 months, 12 months or 2 years?
The Ideal Tenure for STP
First, let’s be clear you cannot prevent pain altogether. Yes, you can make an effort to reduce your pain and/or benefit from the volatile market but not eliminate it.
The next thing to remind yourself is that you have to have your strategic asset allocation in mind. If you are ultimately going to have 60% of your portfolio in equity, then your effort has to align your portfolio to reach that number.
Finally, you have to provide enough time to your money to be able to benefit from equity growth. If the money stays out for too long, you may miss out on the opportunity.
To decide the ideal tenure for STP, here are 2 questions that you can ask and decide accordingly.
#1 How much is the investable amount in proportion to your current portfolio?
If this is less than 10% of your overall current portfolio, I suggest don’t over think this. You can go all in and invest now.
If this is about over 10%, then the ideal tenure for STP can be 12 to 24 months, depending upon your stomach for volatility.
#2 What is the investment time horizon?
If this is less than 3 years, you may want to rethink about investing in equity
If the horizon is 3 to 7 years, 12 to 24 months of STP tenure can be ideal.
For over 7 years, well, you are again overthinking it. Anyways, take your call.
That said, I consider a 6 week or 12 week STP completely useless. You are not giving enough time for the STP to work. Unless the markets decide to reward you with an immediate correction, it is not going to add any significant value. In fact, you may just end up making multiple transactions, adding to your tax return filing headaches.
Remember STP can possibly prevent you from seeing a near term paper loss. But it can work the other way too. You may end up missing out on buying at lower prices as markets keep moving up.
There is no guarantee that you will average your cost lower. You could end up averaging your cost higher too.
Market has its own mind and it is not required to do your bidding or deliver on your expectations.
How do you go about deciding your ideal tenure for STP?