investing

Systematic Transfer Plan, STP in a mutual fund- Is it worth it?

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STP - SYSTEMATIC TRANSFER PLAN IN MUTUAL FUNDS

You have just received a big amount as your annual bonus. While the first temptation was to splurge it all, good sense prevails and you decide to invest 80% of it in equity mutual funds.

But you are not sure how to do it? Should it be one shot lump sum or in parts?

These days what you hear is “Market index touches all time high.” The popular media has this headline all over.

You are now forced to think if this is the right time to invest a lump sum amount in equity mutual funds.

So, you reach out to various forums, blogs, websites and friends who give this advice:

“Do an STP or a Systematic Transfer Plan.”

“Put your money in a liquid fund and then start an STP into the equity fund for 6 to 12 months.”

You feel almost convinced that is the way to go.

Hold on! Why STP at all? Does it really work?

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Investing Math – Distance, Speed and Time

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Investing math - Distance, Speed, Time

Consider the following problem.

Two trains are running on the same track. The only issue is they are running towards each other. It is apparent that they will collide at some point.

Now, there is a fly which is happily flying between the two trains.  The problem is what is the total distance that the fly will be able to cover before its crushed. 

The speed of Train 1 is 60 km/hr while the Train 2 is running at a speed of 40 km/hr. The distance between the two trains is 20 kms. The speed of the fly is 10 km/hr.

This appears to be a complicated problem. Is it?

What approach will you take to solve the problem?

…

As you now know, this problem can be solved using some basic school maths. Yes!

The formula to use is Distance = Speed * Time.

Do you remember this simple formula from school?

Go ahead and apply it to the problem.

However, to make you solve this problem is not the purpose of the post.

What if I tell you that this very formula has an important role to play in your investing decisions too? 

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The A4 Test for your Personal Finance

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The A4 Test of your Personal Finance

Hoarders

That’s the word that defines some investors.

You will know what I mean once you know what their personal finance and investment portfolio contains.

Count the number of mutual funds in their portfolio – 20, 30, 40 upto 50 sometimes.

Then the number of stocks in their portfolio – anywhere from 20 to 100.

A whole lot of insurance policies – from a few to a dozen.

Add to all this the Bank Fixed Deposits, PPF, EPF, NSCs, Bonds, etc.

They have been literally hoarding.

It’s utterly complex.

If all these items are listed on paper, one will need several sheets.

Why do we make life so complicated? Is this greed? Is this ignorance? Effect of having several advisors? Or these investors have a different formula that appears to work for them?

I have not been able to find an answer to this puzzle.

Read more: The Acid Test of your Investment Portfolio

The question now is if this is complex, what is simple?

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Do sectoral and thematic funds fit the idea of best investment?

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SECTORAL AND THEMATIC FUNDS - INVESTMENT UNIVERSE

Take a look at the following mutual fund schemes: (you can click on the names to see detailed reports)

Now, take a look at the following:

What’s the difference in the two lists?

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Equity Investing, as I understand it!

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equity investing

For a large number of equity investors, equity investing is about what they do in the stock market – buying and selling based on ticker prices. That is where it starts, that is where it ends.

The only thing that matters to them are news items such as:

  • Stock market up by 200 points
  • Markets down by 100 points
  • Nifty up 3 days in a row
  • Sensex posts biggest fall in 6 months

and on and on and on.

The onslaught by the media adds fuel to the fire. The best picks of the day are discussed, worst picks are beaten down, target price, stock market predictions, everything that occupies your current time and attention, all leading to nothing.

How is this information helpful? I might be sounding ignorant here, but seriously, help me understand.

Constantly working with only the stock market prices and nothing else has brought us to a situation where we know the price of all stocks but the value of none.

Is this how equity investing really done?

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