The most common investment modes in mutual funds are Systematic Transfer Plans (STPs) and lump sums. Both can create wealth, but their return depends on the market conditions to a great extent – especially during times of high volatility. For investors, the STP vs lump sum dilemma must be addressed by a clear understanding of how they function and affect returns.
In this blog, we’ll explain STP’s meaning in mutual fund investments, compare it with lump sum investments, and analyse which works better during volatile periods.
What is STP?
A systematic transfer plan is a disciplined method of transferring a definite amount of money from one mutual fund to another fund belonging to the same fund house. While it is commonly used to move funds from a debt fund (low risk) to an equity fund (high risk) for gradual market exposure, it can also work in reverse: transferring from an equity fund to a debt fund to secure gains or reduce risk. Additionally, investors can use STP to shift between equity funds for portfolio rebalancing.
What is a lump sum investment?
Lump sum investments imply investing all your money in one go, most probably into equities and holding them for a longer time. It can be adjusted optimally when the valuations are appropriate, and the market is positive.
Why volatility matters
In volatile markets, the stock price fluctuates in the short term due to economic uncertainty, global events, or domestic events such as elections or policy announcements.
STP vs lump sum: How does each respond to volatile markets?
STP and lump sum are beneficial under different situations. Here’s a breakdown base on various factors:
- Risk management
STP:
STP minimises the risk of investing during high market conditions. By investing for a few weeks or months, you can take advantage of rupee-cost averaging.
Lump sum:
The lump sum type of investment is extremely vulnerable to timing in fluctuating markets. Investing at the beginning of a correction can lead to a locked-in loss for several years ahead.
- Potential returns
STP:
STPs help investors take advantage of price corrections in highly volatile markets, effectively lowering the overall cost of purchase in the long run. By spreading investments over time, STPs increase the chances of achieving better returns during bull markets.
Lump sum:
Lump sum investments are most effective when made in highly corrected markets, where prices have already bottomed out. However, in volatile conditions, mistimed lump sum investments can significantly impact returns, making them riskier if market timing is not optimal.
- Psychological comfort
STP:
For most investors, especially first-time mutual fund investors, STPs provide psychological reassurance. The gradual investment approach reduces the fear of market timing and fosters long-term investment discipline.
Lump sum:
Investing a lump sum in the market can be stressful, particularly if the market declines immediately after the investment. Market fluctuations can lead to anxiety and second-guessing investment decisions.
Example: STP in action
Suppose you receive a ₹5 lakh bonus during a volatile market year. Instead of investing the entire amount in equities at once, you park the funds in a liquid fund and systematically transfer ₹25,000 per month into an equity mutual fund through an STP. This approach helps mitigate the risk of poor market timing while benefiting from rupee-cost averaging.
Use an STP calculator
One of the best ways to optimise STP planning is by using an STP calculator, which helps investors:
- Setting transfer amount and frequency
- Estimating the potential future value
- Adjusting transfers in the event of a change in market conditions
Most mutual fund websites provide free STP calculators for you to personalise your plan.
Conclusion
STPs generally offer better risk-adjusted returns than lump sum investments in volatile markets due to rupee-cost averaging and a more conservative approach. While lump sum investments can deliver higher returns in severely corrected bear markets, STPs remain the less risky and more stable choice for long-term investors.
