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Mutual Funds - How not to move your money between an STP and SIP

25 Apr 2011

I recently came across two cases of two investment advisors giving some decidedly weird advice that could have had no purpose except to increase the advisors' own commissions while harming the investors' interests. Both involve conduct which is technically legal but which the fund companies should crack down upon. The cases involve an investment facility known as the Systematic Transfer Plan (STP).

STP is a kind of SIP wherein the money, instead of being a fresh investment, comes from an investment in another fund. The point of an SIP is that it is not safe to invest a lump sum into equity funds at one go. If you come upon a sum of money that you'd like to invest in equity , it is better to invest it all in a low-risk debt fund (a liquid fund) and then give instructions for a part of it to be automatically redeemed from the liquid fund and invested into the equity fund of your choice every month. Here's an example.

Let's say that you'd like to invest Rs 2 lakh into an equity fund. If you put it in all at one go, it's possible that the markets might fall and then you would make a loss. To average out your buying price, you would put it all in a liquid fund and give instructions for say, Rs 25,000 to be shifted to the chosen equity fund for each of the next eight months. In the first case, the advisor made the investor invest the entire amount into an equity fund and then started an STP from that into another equity fund! From any sane perspective, this is a meaningless activity, except that it doubles the advisor's commission.

The investor is exposed to the risk of investing a lump-sum in an equity fund. Then his money is transferred to another equity fund and the agent takes a commission on both transactions. If the investor makes anything on the first fund then he pays short-term capital gains tax since the investment is held for less than a year. The second case was even worse. Here, I happened to be personally involved as the investor is known to me and works with a major media organisation. He asked me for advice on investing a sum of money and I asked him to put it all into HDFC Liquid Fund and then do an STP into a HDFC Prudence, an equity-heavy balanced fund.

Source : ET

Source: www.insuremagic.com BACK