5 Reasons Why STP is Better Than Investing Via a Lump Sum
by Ankita Tripathy Investing 15 November 2024
Is investing via a Systematic Transfer Plan (STP) better than investing via a lump sum? STP investment is fairly safe for those who are accustomed to SIPs and like the pattern of market entry – spread out over a period of time.
A lump sum investment is when you invest your entire investible corpus in a mutual fund all at once. This approach to investing can be risky and has certain disadvantages that can be solved by opting for STPs.
The following article will look at the top five reasons why investing in STP is better than investing via a lump sum.
Systematic Transfer Plan And How Does it Work?
STP investment or Systematic Transfer Plan allows investors to shift their finances from one scheme to another instantly without hindrances. The transfer occurs regularly at set intervals. This allows investors to gain market advantage by changing securities when higher returns are offered.
For instance, STP helps transfer funds from mutual fund schemes to other funds that can be more rewarding – bringing you better ROI. There are different types of STPs such as fixed STP that help transfer a fixed amount between funds. And another one – capital STP – that is helpful in transferring only the capital gains.
Lump Sum Investment
In a mutual fund, when an investor invests a large sum of money in a mutual fund in one go – it is a straightforward investment. It is ideally adopted when an individual has a significant amount of cash for investment.
Generally, investors opt for a lump sum when markets may rise steadily. This is of value as it can maximize returns in the long run.
What is STP And How Does it Differ From Lump Sum Investment?
A STP is the next option for investors who have grown accustomed to Systematic Investment Plans. When setting up a STP, you instruct the fund house to sell a part of the investment in a debt fund and invest in any other scheme.
In addition, the STP investment allows you to earn a little more than you would from a lump sum amount. This makes sense due to the investment happening in equity-oriented schemes. This allows debt funds to excel over the normal savings account in terms of ROI.
The investors decide over a period of time depending on the lump sum amount. This is what makes them decide if they want to deploy the money via STP. Usually, the larger the amount, the longer the time period.
STP investment differs from lump sum in terms of investment timing. In addition, STP reduces the risk associated with market timing which makes lump sum prone to negative effects. On the other hand, STPs are resistant to fluctuating markets where the returns are better due to cost averaging.
In addition, the flexibility of STP investment is better as it can be made depending on the investor’s preference – fast, slow, or stopped at any time. Lastly, a portfolio undergoes rebalancing with STP investment as it switches investment between equity and debt.
Advantages and Disadvantages of Systematic Transfer Plans (STP investment)
STP investment offers resistance to market volatility by spreading the investments over time. This is a great strategy that helps mitigate the impact of market decline as only a small portion of the investment is at risk.
On the other hand, STP investment produces lower returns in comparison to lump sum investment (at higher risk) as a part of the capital is invested in the market.
Five Reasons Why STP is Better Than Investing Via a Lump Sum
Here are the five reasons why STP investment is better than lump sum market entry – no matter if you are experienced or a beginner. Check them out:
1. Investing via a Lump Sum Requires Taking a Higher Market Risk
Investing a large sum of money in an equity fund through a lump sum can expose you to significant market risk, particularly if you invest at a market peak. If the market declines shortly after your investment, your returns can be adversely affected.
An STP helps mitigate this risk by allowing you to invest gradually over time, reducing the impact of market volatility and potentially leading to more stable returns.
2. You Can Benefit from Higher Returns By Investing in STPs
Opting for a Systematic transfer plan can also help you earn higher returns by investing in a combination of equity and debt mutual fund schemes. You can earn returns from liquid and short-term debt funds which offer significantly higher returns when compared to savings accounts.
3. STPs Help You Benefit from Rupee-Cost Averaging
Just like systematic investment plans, STPs help you leverage rupee-cost averaging. You can take advantage of different market situations to minimize your losses and maximize your returns.
4. STPs Offer Great Flexibility
You can start and stop your STP investment at any time. You can take the help of an investment advisor who can also make your STP investments more or less, depending on your financial goals.
5. They Also Help You Rebalance Your Portfolio Well
You can rebalance your portfolio efficiently by effectively using an STP. You can switch from equity-oriented mutual funds to debt funds and balance your portfolio through STPs. Doing so can help you grow your returns and minimize overall risk.
For instance, if you are invested in multiple equity-oriented schemes during a particularly volatile market run, you can use the STP option to transfer these funds to debt-oriented schemes and thereby hedge risk.
Systematic transfer plans help you diversify your investments and act as an efficient hedge against volatile market conditions. You can use STPs in mutual funds for long-term goals like retirement planning as well. The five reasons mentioned in this article make STPs a more efficient mode of investment than lump sum investments.
Final Verdict: STP or Lump Sum?
The choice between a lump sum or STP investment is a tough one when you consider the returns from a single lump sum investment over an STP. However, the stability that STPs offer cannot be beaten by the other as STPs are better resistant to market volatility.
Factors such as risk tolerance, investor’s financial situation, investment goals, and market timing make all the difference. So, after reading the above sections, make your choice while keeping these factors in mind.
STP is for you if you want a risk-free, market-friendly and spread-out investment, alternatively, lump sum is for you if the market risks and volatility do not scare you.
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