Should I Invest A Lump Sum In One Shot Or Systematically via STP

Published: March 13, 2017 at 12:12 pm

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.

Lump sum vs 1Y STP.

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.

Lump Sum vs 2Y STPs

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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