Systematic transfer plan: Wealth creation or insurance strategy?

Subscribe to enjoy similar stories. I lost money through the systematic transfer plan (STP). I would have been better off had I invested a lump sum," said a disgruntled Ayush, who had recently invested in an equity mutual fund via an STP.

An STP divides an investment amount into instalments over a specific period, typically varying from a month to a year. The money is initially held in a low-risk mutual fund such as a liquid or money market fund, and gradually transferred to a higher-risk equity fund at regular intervals. STPs can be fixed or flexible.

A fixed STP transfers a set instalment over a specific time interval. A flexible STP transfers a variable instalment, typically depending on market conditions, with a higher amount transferred when markets are low and vice versa. Ayush’s analysis showing lower gains through a systematic transfer plan (STP) compared to investing upfront was accurate for his specific investment period, though it may not hold true universally.

In his case, Ayush invested ₹3 lakh in a liquid fund, which was systematically transferred in three equal monthly instalments into an equity mutual fund. The first instalment of ₹1 lakh was invested at an NAV of ₹40, fetching 2,500 units; the second went in at an NAV of ₹39, buying 2,564 units; and the third at an NAV of ₹42, purchasing 2,380 units. In total, he accumulated 7,444 units.

At the current NAV of ₹43, these units were worth about ₹3.2 lakh. His average purchase cost worked out to ₹40.3 per unit, having bought 7,444 units for ₹3 lakh. Instead, had Ayush invested ₹3 lakh upfront in the equity scheme at NAV ₹40, he would have gathered 7,500 units, the current value of which would have been ₹3.22 lakh.