Guests to my home have a knack of arriving without prior notice. It looks as though the whole mobile revolution has just escaped my extended family. They love to surprise us with their unplanned visits. Earlier I would get very unsettled with these unannounced visits and the follow up high teas and dinners. No longer!
The last few years have seen a surge of mompreneurs in our city, look around and every housing society has home cooks, bakers, event planners etc. you name it and you have it. So now whenever someone visits I quietly order a meal from the home cooks and pass it off as mine! I must mention there are many like me who are regular patrons and are a reason for the success of the mompreneurs. They enjoy a large and loyal clientele and have established a good business from their homes!
A few weeks ago I got curious and wanted to understand what do they do with all the money that they are earning. I called a few of my mompreneurs friends to do a survey of sorts and the answer surprisingly was “Nothing”! Money just stays in a savings account and used to fund a few expenses around the house. The good part was most wanted to invest in mutual funds but was apprehensive to commit to a SIP (systematic investment plan) as their income is irregular.
Well, the solution is simple. Use STP, Systematic Transfer Plan. People with erratic income who want to invest in mutual funds can accumulate funds in a short-term debt mutual fund and transfer from there in a systematic way to equity mutual funds. STP like SIP staggers the investment over a period of time and helps benefit from rupee cost averaging.
What is STP?
STP is a facility provided by the mutual fund house that allows investors to invest a lump sum amount in one scheme and transfer regularly a pre-defined amount into another scheme.
The scheme that is considered for lump sum investment is called ‘source scheme’ and the scheme to which the amount is transferred is called ‘destination scheme’ or ‘target scheme’.
Generally, investors put lump sum amounts into a liquid fund and transfer it to an equity fund.
How does it operate?
Every month or whenever you generate a surplus you invest it in a short-term debt fund instead of keeping the money in a savings account and in parallel set up an STP in an equity fund. Process is explained with an example below:
| Month | Surplus | Investment in Debt Fund | STP in equity per month |
| Month 1 | Rs 20,000 | Rs 20,000 | Rs 10,000 |
| Month2 | Rs 10,000 | Rs 10,000 | Rs10,000 |
| Month3 | Rs 10,000 | Rs 10,000 | Rs 10,000 |
| Month4 | – | – | Rs 10,000 |
| Month5 | Rs 4,000 | Rs 4,000 | Rs 10,000 |
| Month6 | Rs 20000 | Rs 20000 | Rs 10,000 |
Depending on the expected surplus that will be generated you can decide on the amount to be transferred. Transfer facility is available on a daily, weekly, monthly and quarterly interval. You can at any time increase, decrease or completely stop the STP as well.
How do you benefit?
In an STP, the money remains invested in a short-term debt fund till it is transferred to equities. This money earns a return, which is generally higher than that of a savings account. STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV (net asset value) and more at a lower price just like a SIP.
Next Steps
- Evaluate your last 6 months or 1-year cash flow
- Understand the amount of surplus that is generated
- Check the amount currently lying idle in the savings account
- Invest the amount lying idle in the savings account in a Liquid fund/s of any reputed fund house/s
- Set up an STP of the expected surplus into equity mutual fund/s
- Relax!
There is a lot of satisfaction and security in seeing your money grow so it is imperative for all of us to take out some time from our busy schedules and plan our investments. Read more on how to plan your investments here
Featured Image Source: iStock
