As a financial planner I have always come across a question: How’s the market looking?
Simple answer is “I don’t know” but in India simplicity is extremely scarce. Everyone is posing to be an expert about everything. So, being a financial planner, how come I know nothing about the market? Again, simple answer, I really don’t know which market are we talking about? Debt market, commodities, equity, or fish market.
Obviously, I am being asked this question in relation with equity markets, most specifically the Sensex.I must be stupid not to realize that in the first place. Well as of now,BSE Sensex is hovering around the 60000 mark, everyone knows that. And how is the market looking?Of course, it is looking Great!
But what I am being asked is where do I see the market in the coming few months.The simple answer is I don’t know. In the past 25 years I have not met anyone who has correctly predicted the short-term movement of the equity market more than a couple of times.
There are more than 7000 listed companies in India.The Top 30 in terms of trading volumes come in the Sensex or the Sensitivity Index. The top 100 companies form BSE 100, the Top 200 form BSE 200 and so on.I will be pleasantly surprised if one can give me the value of BSE 100, 200 or 500. I’d give Rs.100 to anyone who can give me at least 2 of these figures,even if they’re close by 1000 points.
For your information, the index value of BSE 100 is 18200, BSE 200 is at 7700 and BSE 500 is at 24000.You can play this game with anyone who claims to know the future of the equity markets in India.
Over the past one year, record number of Demat accounts have been opened in India.This will broaden the equity investors’ base of our country. Over the years we have seen this trend. New customers come into the market only when markets are high.However, lump sum investments may expose investors to risk of incorrectly timing the markets.And waiting indefinitely for the right opportunity to enter the market could result in losing out on valuable returns.
Systematic transfer plans (STPs) offer as a solution to this quandary. What are STPs? The STPs allow investors to invest a lump sum amount in a source scheme and transfer a pre-defined amount regularly to a target scheme.Typically, liquid or ultra-short-term funds are used as source schemes and equity/balanced funds are preferred as target scheme choices.However, STPs can also be used to systematically reduce equity exposure, especially when markets appear to have peaked.
- STPs allow a disciplined approach of staggering investments into equity funds,especially when investor has a large investible sum
- STPs defend against market volatility as cost of investments is averaged over the period of investment
- Hassle-free change in asset allocation from debt to equity and vice versa
- Source fund continues to generate returns
- Removes emotional bias from the decision-making process
When To Invest in STPs?
Following are few instances, where STPs could solve your investment quandary:
- Sale proceeds of property
- Bonus salary received at year end
- Large investment in fixed deposits/saving accounts needing a shift in allocation to equities.
STPs Versus SIPs
- STPs and systematic investment plans (SIPs) serve different investment purposes
- STPs cater to investors with lump sum funds at their disposal,who intend to stagger investments in equity markets,to avoid timing the market
- SIPs are suitable for investors who have a steady stream of inflows,a portion of which may be invested in equities in a disciplined manner
Why this Works
Use of STPs in a staggered manner is one of the best investment strategies for retail investors looking to invest a lump sum amount. It enables the investors to capitalise on the market boom and at the same time it mitigates the risk of capital erosion due to unfavourable market timing.However, investors can reap the benefits of STPs only if they follow the strategy consistently.Discontinuation of STPs on account of short-term movement may prove detrimental to the financial planning of investors.
Views are personal: The author is Soumyajit Ghosh, Director,Wealthapp Distributors, Kolkata
Disclaimer:The views expressed are of the author and are personal.TAML may or may not subscribe to the same.The views expressed in this article / video are in no way trying to predict the markets or to time them.The views expressed are for information purpose only and do not construe to be any investment,legal or taxation advice.Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully