How to Invest a Bonus or a Sudden Cash Flow – STP

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It’s hard to make an investment decision when you are dealing with a sudden large sum of money – a windfall gain, bonus, sale of an asset. Equity market is a great choice but it comes with a possibility that there may be a sudden crash in the market and you may see a sharp erosion in your wealth. This fear may stop you from taking any decision and you may end up investing the entire amount in a Bank FD or a Debt fund. This may be an appropriate option from the perspective of parking funds for the short term but will be a real compounding killer over the long term. Read more on the performance difference of Bank FDs vs Equity Mutual Funds here.

Remove the Anxiety of Timing the Market

The key here is to invest in the equity market without the anxiety of timing the market. This can be achieved by investing the lumpsum cashflow in a Liquid fund* (these are similar to short term debt funds) and then move a portion of that liquidity to the equity market in a periodic manner (weekly or monthly etc) over a time horizon of your choice (over 1 year, 2 years and so on). This concept has been automated by the fund houses through an offering called the Systematic Transfer Plan or STP.

The above can be illustrated with an example
Let’s say you have received a bonus of INR 5 lakhs to invest. You do not have an immediate need for these funds and you intend to build your savings/investments portfolio. You may choose to invest this sum over the next 1 year by the way of an STP. Using an STP you can park this sum in a Liquid fund and automate the process of transferring INR 42,000 (INR 5 lakhs/12 months) every month to the equity fund of your choice. Using an STP you can choose the tenor over which you would like to invest.

Sample Process Flow

  1. Check for available Liquid Funds
    Choose the Fund Selector option at https://www.valueresearchonline.com/funds/

    Select ‘ICICI Prudential’  for the Fund House
    Select ‘Debt: Liquid’ for the Fund Category.
    Hit Go
  2. Decide on your liquid fund based on Fund performance and Expense Ratio. I would not worry too much about the liquid fund selection though. Your main focus should be on getting the right equity fund.Choose ICICI Prudential Money Market Fund.
  3. Invest Money in our Liquid Fund
    Log in the website of your Fund House. You will have to go through a KYC process in case it’s a new account. Invest the money in ICICI Prudential Money Market Fund
  4. Setup an STP (Systematic Transfer Plan)
    This is the instruction to move money from the liquid fund to the equity fund.

Most Fund Houses have a similar process flow in their interface. In case you don’t see the STP option you can call up the call centre or your broker to determine the exact flow.

Liquid funds* are debt mutual funds that invest money in very short-term market instruments. These funds can invest in instruments up to a maturity of 91 days. You can expect bank FD like returns with the money in your liquid funds. They are usually considered safe and liquid.
You will be charged 28.3% tax (Dividend Distribution Tax – DDT). You don’t need to pay any additional income tax over the DDT for the returns on your liquid fund.

 

 

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