If you had invested in Equity mutual fund in early 2008, even after 5 years post-election rally you would have just made sub 5% p.a. return. Learn how to avoid situations like these.
There is an old saying “invest in equity when markets are low, invest in debt when markets are high”.
The practical challenge is that you will never get to know that the market is high or low. As markets are volatile and can go up or down very soon, there is always risk of losing a big chunk of your investment.
Take a case where you want to invest 10 lacs in Equity Mutual funds and suddenly market crashes for next 2 months. In such a situation, a systematic transfer plan (STP) of mutual fund can effectively be used to reduce risk.
Systematic Transfer plan is suitable for investors who want to invest lump sum money in equity schemes in order to avail the potential for higher growth. Firstly, invest a lump sum amount in a debt-oriented scheme.
Specify a desired amount to be transferred to any equity schemes of the same asset management company.
For example, you want to invest Rs 10 lac in equity funds and you have selected ICICI Pru focused bluechip fund and ICICI pru discovery fund.
Then you park you money first in ICICI pru liquid fund and provide instruction to transfer Rs10,000/week each to selected ICICI Pru focused bluechip fund and ICICI pru discovery fund.
Over a period of one year, your money will be invested into selected schemes. This method of investing will protect you from investing at high of the market and the investment cost will be spread across 1 year.
With an STP, you choose a particular amount to be transferred from one mutual fund scheme to another of your choice. You can go for a weekly, monthly or a quarterly transfer plan, depending on your needs.
If you are looking at gradually exposing yourself to equities or reducing exposure over a period of time, then STPs are a good option.