Most investors chooseto invest in mutual funds through lump sums or Systematic Investment Plans (SIPs). However, people are unaware of a third powerful method of investing, a Systematic Transfer Plan (STP).
Understanding the STP meaning in mutual fund investments will allow you to navigate bull and bear periods wisely to achieve maximum returns.
Here, we are going to talk about how an STP is applied in bull and bear markets, and how tools like an STP calculator can help you plan better.
What is STP?
A systematic transfer plan enables you to systematically transfer a fixed amount of money at predetermined intervals from one mutual fund scheme to another within the same mutual fund house. The shift is usually from a debt scheme (low risk) to an equity scheme (high risk, high return).
This method offers:
- Exposure to equity in a staggered way, reducing timing risk
- Rupee-cost averaging benefit
- Chance of earning greater returns than storing your money in bank accounts
Adjusting STPs under different market conditions
Here’s how you can adjust STPs in bear and bull market phases:
STP strategy during a bear market
Share prices fall in a bear market, typically due to economic slowdowns, global crises, or poor investor sentiments. It is the right time to invest in equity at cheaper prices.
Suggested STP strategy:
- Beginwith investing a lump sum amount in a liquid or debt fund.
- Schedule periodic STP transfers (fortnightly or weekly) to your chosen equity fund.
- It helps you buy equity at lower valuations, lowering your average acquisition cost.
How it works:
- Bear markets usually undergo big corrections but end up making a comeback.
- STP prevents you from investing the entire lump sum in one instance and reduces risk.
- When prices are low, each transfer buys more units, helping you get higher returns when the market rises.
STP strategy in a bull market
When it is a bull market, economic growth, high corporate profits, or foreign liquidity increases the stock prices. Thus, investing in equities during such a phase means buying fewer units at a higher price.
Suggested STP strategy:
- If investing in a lump sum, attempt to keep it invested in a debt fund and switch it gradually over time (monthly rather than weekly).
- Otherwise, if valuations look very high, pause new transfers for some time and allow correction.
- Use a PE ratio tracker or your fund house’s STP calculator to plan the transfer amount and term.
How it works:
- Bull phases are the worst to predict – they could stretch for years or reverse in a flash.
- STP ensures you are not investing all your money during a bull market, reducing the risk of lower returns.
- A longer transfer period helps smooth out volatility by taking advantage of occasional market dips during an ongoing rally.
Plan smarter with an STP calculator
An STP calculator would help investors in:
- Calculating necessary transfer amount and frequency.
- Forecasting future value through the history of a fund.
- Rebalancing investment plans to match evolving markets (e.g. speeding up during bear markets and slowing down during bull markets).
Almost all mutual fund houses have free STP calculators on their websites, soinvestors can plan their investments hassle-free.
Conclusion
STPs help ride out the bull and bear market phases. By being aware of the significance of STPs in mutual fund investing and using an STP calculator, you can create an adaptive investment plan. Such a predefined plan minimises risk and maximises reward in different market cycles.
