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Want to use volatility in equity market to your advantage? Go for STP

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OVER the past few years, investors have been pampered with the concept of systematic investment plans (SIP), especially, when it comes to investing in mutual funds. A quick recall of its evolution may sound something similar to the following paragraphs. Investors, initially relied on his or his adviser's judgment to time investments in shares/equity funds, but, found the whole exercise futile and many-a-times found themselves caught on the wrong side of the markets. Thus, the concept of SIPs was created to tide over the fallacies of market (mis)timing.

Over time, innovative thinking helped evolve the concept of value averaging investment plans to enable better cost averaging. Under such plans, the monthly contribution varies from month to month depending on the market performance. Accordingly, the plan allows monthly contribution to be increased if the markets trends lower and decrease contribution in good times.


Thus, a value averaging investment plan helps in buying more when the markets are down and less when the markets rise. SIPs are quite a hit among investors who prefer to invest every month out of their savings. This is extremely necessary during high periods of volatility in markets like the ones experienced at present.

A systematic transfer plan (STP) positions itself as a good solution here.


Under this plan, a lump sum is invested in debt fund with instructions to invest a fixed sum at every fixed interval (which could be weekly, fortnightly or monthly) to the designated equity fund till the target value of investment in the equity fund is achieved. Recently, a new concept called swing STP has been introduced by HDFC Mutual Fund. The objective of this facility is to achieve the total market value in the equity scheme by transferring an amount from the debt scheme at regular intervals in a way so as to increase the target market value of the units in the equity scheme systematically by a fixed amount on the date of each transfer till the swing STP tenure.
The amount to be transferred will be determined at on the basis of the difference between the target market value and the actual market value of the equity fund as on the date of transfer.

In the above example for a swing STP, the total market value will be Rs 5 lakh at the end of 10 weeks. Thus, the objective is to increase the market value of the equity fund by Rs 10,000 every week by transferring funds from the debt fund. If on the designated day of transfer during the second week, the value of the equity fund is Rs 12,000, then, only Rs 8,000 will be transferred from the debt fund. If on the designated day during the fourth week, the market value of the equity fund is Rs 28,000, then, Rs 12,000 will be transferred from the debt fund to achieve the targeted market value of Rs 40,000 at the end of four weeks.

At present, swing STPs offer transfer facility at week ly, monthly and quarterly intervals, to be selected by the investor. In addition to the above, the facility has a unique `reverse transfer' option. Under this option, if the market value of units in the equity fund on a particular transfer date is higher than the target market value as on that date, then, the excess amount will be transferred from the equity fund to the debt fund. Thus, the total amount invested through a swing STP to an equity fund may be higher or lower on account of market fluctuations.

To sum up, swing STPs are yet another tool that can be utilised by investors to tailor their investment strategies as per their goals to take maximum advantage of the fluctuation in equity markets.

Happy Investing!!

 

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