Last Updated on September 23, 2020
The systematic transfer plan (STP) is a way for an asset management company to lock into some “business”, just as jewel shop does with a “gold scheme”. It can be used to withdraw from one mutual fund to either generate regular income or transfer that money to another fund (typically equity) in the name of “reducing risk” relative to a lump sum investment. In this post, I present some Lump sum vs STP data.
Before we begin, it is important to recognise choosing a STP over a lump sum is mainly for psychological reasons than for gains or returns. Many equity investors have trouble handling losses. If they dump 1 Lakh today and find that the market rose by 4% the next day, they act like a kid in a candy store (that is what it was being in AIFW yesterday as the election results came out). However, if the market falls by 4% the next day, they are going to be consumed by regret. So for such people, an STP is a better idea.
Of course, one must first be able to define what a lump sum is, and this changes with time. I have covered these aspects before: How to invest a lump sum in an equity mutual fund?. I believe the simplest way to invest a lump sum is to get rid of it by manually investing over a few months (less than a year) if lump sum investing is scary. In this post, I present some data for those who would like to see some.
Important: Lump sum or STP, once the entire amount is invested, the risk associated with either method is the same. The entire amount will be subject to the ups and downs of the market.
In April 2013, I had published a Comprehensive Mutual Fund Investment Mode Comparator. This my first Excel Macro and by current standards, not as comprehensive. I compared Lump sum vs. STP for all possible 3,5,7,10,15,20 and 25-year periods between 1980 and 2012 using historical Sensex monthly data and showed that
- Both lump sum and STP modes have a similar probability of loss irrespective of duration.
- The chance of STP doing better than lump sum mode is only 25-35% for all durations.
A 3 year period is a bit too long for an STP. And for just a few months, annualised returns are not relevant. One year is just passable. Two years is okay for analysis, but not practical (although some do it! Waste of time and money). Anyways for what it is worth, I have updated the above study for just 1Y and 2Y periods.
Suppose I have Rs. 1000 and I consider this as a lump sum.
(a) I invest it today and calculate the corpus and return after 1Y or 2Y (Lump sum investing)
(b) I invest in equal instalments over 1Y or 2Y and then calculate the corpus and returns. (STP Investing)
Depending on market conditions, (a) may be better than (b) or vice versa. The problem with a SIP is that calculating the XIRR (annualised return) may not always be possible. If the process ends in a loss, then the XIRR function often returns 0%. This is not an actual return, but an inability of the function to estimate returns. See more: IRR/XIRR: Limitations of Calculating Complex Cash Flow Returns
When tested with 433 1-Year STP periods (separated by a month) from March 1980 to March 2017, as many as 130 STP returns were 0% (or indeterminate). So they were excluded for comparison.
Among the rest of the periods, a lump sum investment had a higher return than a STP 52.5% of the times. And when the corpus was compared, the Lump sum corpus was higher 65.8% of the times.
When tested over 420 2-Year STP periods, the Lumpsum corpus was higher 72.9% of the times and with a higher return 44.6% of the times (excluding 0% XIRR). So there is no proof that the STP is better than a lump sum.
It is okay to say that an STP is a calmer way of investing a lump sum. There is no argument here. The amcs probably see it as a way of retaining the lump sum for longer and hence promote it.
It is not okay (rather baseless) to claim that an STP will do better than a lump sum.
I think either a lump sum or a pretty short STP (over 3-4 months) should do.
Some History
Systematically investing the same sum each month is called dollar cost averaging. There many studies that have compared lump sum investing and dollar cost averaging and have pretty much concluded the same: Lump sum is superior to STP in terms of financial instrument performance (not investor performance).
This is a summary: Dollar Cost Averaging—Myth vs. Reality
Does Dollar Cost Averaging Make Sense For Investors?
Nobody gains from Dollar Cost Averaging
A note on the suboptimality of the Dollar Cost Averaging as an investment policy
Please Note: The above studies compare a lump sum investment and dollar cost averaging or STP. They are not talking about a SIP.
Ask Questions with this form
If you have generic questions on personal finance, you can ask them using this form, and I will respond to them next week. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.
[contact-form][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Comment’ type=’textarea’ required=’1’/][/contact-form]
New Delhi DIY Investor Workshop April 23rd 2017
Register for the New Delhi DIY Investor Workshop April 23rd 2017
You Can Be Rich Too With Goal-Based Investing
Happy to announce that my book with PV Subramanyam has been selected as part of Amazon Best Reads Mar 2017. now 50% off. Thank you for your support and trust. If you have not yet got the book, check out the reviews below and use the links to buy.
Reader Quotes:
Gift it to your Friends and Relatives whom you care more. Already follower of Pattu and Subra’s forum. Ordered 4 more copies to give gift to my friends and eagerly waiting to read
The best book ever on Financial Freedom Planning. Go get it now!
Your first investment should be buying this book
The (nine online) calculators are really awesome and will give you all possible insights
Thank you, readers, for your generous support and patronage.
Amazon Hardcover Rs. 199. Now 50% OFF.
Kindle at Amazon.in (Rs. 307)
Google Play Store (Rs. 307)
Infibeam Now just Rs. 307 24% OFF.
If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!
Bookadda Rs. 344. Flipkart Rs. 359
Amazon.com ($ 3.70 or Rs. 267)
Google Play Store (Rs. 244.30)
- Ask the right questions about money
- get simple solutions
- Define your goals clearly with worksheets
- Calculate the correct asset allocation for each goal.
- Find out how much insurance cover you need, and how much you need to invest with nine online calculator modules
- Learn to choose mutual funds qualitatively and quantitatively.
More information is available here: A Beginner’s Guide To Make Your Money Dreams Come True!
What Readers Say
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Join our courses in exclusive Facebook Groups!
- 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
- Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content) in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)