Investors with a lump-sum investment amount are usually faced with the dilemma of how to time their investments, especially during a market high. Most opt to time the market and invest the amount entirely as a lump-sum. However, STPs or systematic transfer plans present a better alternative. STPs allow for a disciplined transfer approach where you transfer a fixed amount of money from a particular debt MF scheme to another equity-oriented scheme within the same fund house. Lump-sum investments can go wrong if mistimed. STPs minimise market risk by allowing investors to capitalise on market opportunities and limit the impact of market volatility on their returns. If you have a lump-sum surplus to invest, here are 5 reasons why opting for STP is better than lump-sum investing in mutual funds.

STPs are ideal for investors who have a lump-sum amount at their disposal. So, if you have just received your annual bonus or proceeds from a property sale, you can consider STP. Here’s a list of reasons why STP is a better option than lump-sum investing in mutual funds:

Market risk

Equity mutual funds carry a higher market risk than any other category of mutual funds. Investing a lump-sum amount into an equity-focused mutual fund scheme can enhance the impact of this market risk on your portfolio. If the markets perform well, you could mint a high profit from such an investment. However, if markets fall, a substantial portion of your invested funds can get eroded in the short-term. This is one of the many reasons why STP is better than lump-sum investing when it comes to MFs. STP allows you to transfer sums periodically and gain market advantage by changing to securities that offer higher returns. In this way, STPs help safeguard your interests during market fluctuations, minimising the market timing risk associated with lump-sum investments.

Better returns

STPs allow you to invest at different levels of the market, offering potential opportunities for better returns over time. Spreading your investments across asset classes and sectors helps you leverage market dips and peaks to maximise returns at all times. This is a far better approach compared to lump-sum investing, where your returns are entirely dependent on how market conditions impact your single investment. This is one of the reasons why STP is better than investing lump-sum in mutual funds.

Cost averaging

Working like SIPs, STPs offer the benefit of cost averaging over time. Since you invest at regular intervals regardless of market conditions, the average cost per unit reduces over time. This also helps lower the impact of market volatility on your investment. Conversely, when you make lump-sum investments, the entire invested amount is subject to the current market state making it difficult to benefit from market ups and downs.

Flexibility

When it comes to investment flexibility, STPs are better than lump-sum investing. You have the option of customising your STP directive to suit your needs. Depending on the market conditions and your liquidity requirements, you can hasten the transfer pace, make it slower, or even stop the STP at any time. This absence of this adaptability in lump-sum investments makes STPs better than lump-sum investing in mutual funds.

Rebalancing

STPs allow you to switch from one mutual fund scheme to another. They play a key role in effectively rebalancing your portfolio to ensure that your asset allocation remains well-aligned with your financial goals. For instance, if money in your equity investments increases, raising your risk exposure beyond the target level, it can be reallocated to debt funds through STPs to balance risk. Transferring funds systematically allows you to maintain a balance between equity and debt exposure in your portfolio. Lump-sum investments, on the other hand, require manual rebalancing which can be time-consuming and result in missed opportunities in shifting markets.

• STPs allow investors to mitigate market risk and mint higher returns by shifting to more profitable securities during market swings.
• STPs leverage cost averaging principles to buy when average prices are low and sell when market prices rise.
• Unlike lump-sum investing, STPs offer the benefit of investment flexibility and rebalancing.

In summation, STP is a powerful tool for investors who wish to gradually shift their investment from one fund to another, especially during volatile market conditions. By leveraging STPs, you can stagger your investment over time, taking advantage of market fluctuations and possibly reduce the impact of market volatility on your portfolio. While STP is better than lump-sum investing, you should note that you can start an STP from one mutual fund to another if they belong to the same AMC.

Do you rather prefer the tried and tested SIP route? Head to the Bajaj Finserv Mutual Fund Platform to start your mutual fund SIP today. On this smart platform you can make investments in a few minutes, compare 1000+ mutual funds, and estimate returns using the Mutual Fund Calculator tool. Moreover, you can access a wealth of MF knowledge through our research blogs and learn how to invest better.