Navigating Volatility: How STPs can benefit investors

There has been high volatility in the equity markets with alternate bouts of ups and downs, which leaves retail investors worried about when they should deploy their funds into equities. One way to beat this is to stagger investments using a systematic transfer plan, where a fixed amount goes into a equity scheme from a liquid fund over 6-12 months.

WHY ARE SOME INVESTORS UNSURE ABOUT ALLOCATING LUMP-SUM MONEY TO EQUITY FUNDS NOW?
Over the last couple of months there has been heightened volatility in stock markets. The Nifty lost 3.4% on April 7 on fears of tariffs, while it gained 3.8% on May 12 as geopolitical tensions eased, and US and China suspended a part of their tariffs for 90 days. In addition to this the Nifty 50 has moved up or down by more than 1% for seven sessions in this period. Investors are worried that if they put all their funds now and the market falls there will be a mark-to-market loss. Due to this many investors are simply left waiting on the sidelines and unable to take action.

HOW DOES A SYSTEMATIC TRANSFER PLAN (STP) WORK?
STP is a way to spread your investments over a time period to take advantage of volatility in equity markets. Investors stagger money typically from a liquid or overnight fund to an equity fund over a period of time. The frequency of transfer can be daily, weekly or monthly as decided by the investor. The big benefit of using an STP is that till the time the money remains invested in a liquid fund, it earns an extra return, which is generally higher than that of a savings bank account. Currently, investors could earn 6% returns from such funds. In addition, STP helps in averaging out the cost due to volatility in the stock market. Typically, it is used to stagger money from debt to equity, but some savvy investors also move money from equity to debt to rebalance portfolios in rising markets.

WHAT IS THE DIFFERENCE BETWEEN AN STP AND AN SIP (SYSTEMATIC INVESTMENT PLAN)?
Both these methods stagger money into equity. An investor having cash, and who believes equity will do well over the long term but worried about near-term corrections can use STP. The advantage is that money is parked in a liquid/ultra short term fund, and earns higher returns than a savings account. STPs are done for shorter time frames of 6 months to 18 months to tide over volatility in markets. SIPs are done by investors who do not have lumpsum money and depend on their monthly salary or professional income to help them invest. They are done for longer tenures of more than 5 years to meet long-term goals.