Recent media blitz by Mutual Funds about the Systematic Investments plans or SIPs has helped establish them as an easy and effective tool for wealth creation. However, I still come across a large section of people in the self-employed category staying away from SIPs. Since they have erratic income flows and unsure of their cash flows they are wary of committing themselves to fixed periodic investments. Well my solution to them is to use Systematic transfer plans or STPs to get the same benefits as in a SIP.
How it works?
Self-employed or anyone with erratic cash flows can first park their money in liquid schemes and then invest a fixed amount using STP in an equity mutual fund.
For example: You currently have surplus Rs 20,000 in your account which you want to invest in an equity mutual fund. You first invest this into a liquid scheme and then use STP to transfer a fixed amount to the equity mutual fund. You can keep adding the money to the liquid fund as when you have a surplus. STP works just like SIP, it staggers your investment over a period of time and helps maintain a balance of risk and return
Transfer facility is available on a daily, weekly, monthly and quarterly interval.
How do you gain?
In an STP, the money remains invested in a liquid fund till it is transferred to equities. This money earns a return, which is generally higher than that of a savings account. STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV (net asset value) and more at a lower price.
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