How to build an equity mutual fund portfolio with the gains from liquid fund

[Kanika Shelatkar]

Mutual funds India has 11 categories of equity mutual funds which serve the different risk profile and investment need of mutual fund investors.

Within equity mutual funds of each category, best equity mutual funds are the ones which have consistently beaten the category average returns and the benchmarks returns over time.

While we know that equity mutual funds are the best asset class for wealth creation, but at the same time they are risky too. What about those who are risk averse and do not want to invest in equity mutual funds but want returns better than debt funds.

There is a solution – Mutual funds India have a facility of investing in mutual funds, known as Systematic Transfer Plan or STP. STP helps your transfer units/ amounts from one fund to the other in the same AMC at certain frequencies. However, there is variant of STP using which you can transfer only the profits of debt funds and build an equity mutual funds portfolio without taking much risk. It is known as STP Profit Transfer.

How it works
You can invest a lump sum amount in a liquid/ ultra-short term/ low duration debt fund and transfer the profits from this investment to equity mutual funds of your choice in the same AMC at a certain frequency – say, weekly, fortnightly or monthly. To opt for this option, you need to sign and submit the STP transaction form while making the lump sum purchase to the AMC.

Once the application is accepted, the AMC starts transferring only the gains of the debt fund you have invested in to the equity funds you have chosen while maintaining the original investment amount as it is. To do this, the AMC redeems unit upto the extent required for transferring the profit from the debt scheme to the equity scheme.

Let us understand this through an example -

Ravi invests Rs 20 Lakhs on Nov 23, 2011 in a good performing liquid fund and chooses to transfer the gains from this investment to good equity mutual funds of the same AMC monthly from Nov 23, 2012 (we are not disclosing the scheme names as this article is meant for investor education).

The STP profit transferred started on Nov 23, 2012 is still continuing and the current investment values are as follows –

The total profit of Rs 13.29 Lakhs from the debt fund transferred to equity fund has grown to Rs 52.56 Lakhs as on date (November 24, 2021). The equity fund gave over 24% annualized returns while the debt fund gave over 7% annualized returns. The overall portfolio return is above13% annualized.

Why it is a useful way to invest in equity mutual funds

It could be useful for following reasons –

Investors who do not want to take much risk with their investments and happy with slightly higher returns over fixed income.

Investors who do not want any erosion in the principal invested amount.

Investors who are interested to invest in equity mutual funds but without taking much risk

This method works as a smart asset allocation strategy for risk averse investors.

Long term investors who want to build equity mutual funds portfolio without risking the principal investment amount.

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