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.
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Hi Pattu ,
Good article . I would just like to say thank to you and Subra for the wonderdul advice that you have been imparting all these years . Your book too is a real eye opener . Also your blog has really changed my financial life.
Getting back to the article , just wanted to know your view points on lumpsum investing and what should be the trigger for same . Understand that most people keep PE/PB/ Div Yield ratio of the Nifty when Investing same . However looking at past records , I feel that if the goals are more than 10-15 yrs away then it really doesnt matter much at what levels the sum is Invested because the difference after 10-15 yeras between returns is not too much .
Kindly share your views on this . I too tend to get confused most times as though i think the above to be true , I am still apprehensive when Investing lumpsums at current market levels.
Thank you very much. Yes I am fan of investing the lump sum asap ignoring other metrics like PE, PB etc.
Let say some one goes for lump sum at current stage of market.Will it be better than STP?
At the moment market is already at high so lump sum can be risky rite?
I have understanding to invest Lump sum if market is at Low.how if we invested the lump sum amt and market goes down after tht.
If people know what was high and what was low no one will make any money. I cannot answer your question other than to point out the results published.
In the post you quote "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."
I would chose STP over lumpsum investment precisely for this reason - I should not lose part of my capital due to a crash, where STP could have reduced the volatility. Hence ignoring the negative returns doesn't lead to a correct analysis.
In my understanding, a Lumpsum would refer to a very huge amount compared to my present holding. Say a person having 35 Lakhs in equity investing 1 crore (may be proceeds from sale of a house or plot) in equity.
Instead of investing a lumpsum in one shot, one could decide upon an asset allocation ratio between Debt and Equity and invest the Equity portion in one shot, and use the Debt portion to even out the volatility.
They were not negative returns. The returns were indeterminate (even though the corpus is +ve) and hence there was no other choice. However, the all corpuses were compared as shown in the figure and it does not make much of a difference. The results will not change whether you considet 1000 as a lump sum or 1Cr as one.
Hi Sirs, I was told, investments in Debt Funds should always be Lumpsum(in one go) as fluctuations are very less compared to equity MFs and for psychological reasons, STPs can be considered.
I
For you can put it in one shot