If you are thinking of putting away money regularly in a mutual fund (MF) scheme, systematic investment plan (SIP) is the first thing that comes to your mind. This is a facility offered by all fund houses that entails you to invest a sum every month. Most of us do SIPs in only equity-oriented funds. But Birla Sun Life Asset Management Co. Ltd wants to change your mindset. It, now, wants you to set aside money every month even for its debt funds. Let us take a look at what’s on offer.
What is it?
Called the Recurring Savings Plan (RSP), the facility allows you to invest in its debt funds regularly every month, just like an SIP. For this purpose, Birla Sun Life AMC has set aside two of its debt-oriented schemes—Birla Sun Life Monthly Income Plan (BMIP) and Birla Sun Life Medium Term Plan (BMTP).
However, there’s a fine line that separates an RSP from SIP. While SIP works best in volatile markets, RSP doesn’t aim to play on volatility. Says A. Balasubramanian, chief executive officer, Birla Sun Life AMC, “Typically, we invest in equity funds through SIPs because equity markets are characterized by volatility. But debt funds aren’t as volatile. So while SIPs aim to give you the benefit of rupee cost averaging (a principle where if prices drop, more units are bought and when prices rise, fewer units are purchased; thereby averaging the cost price), RSP does not intend to benefit from volatility because there isn’t much volatility in debt funds.”
RSP also offers an insurance cover. In the first year, you are entitled to a cover equivalent to 10 times the monthly instalment. In the second year, your cover goes up to 50 times your monthly instalment. In the third year and beyond, your cover is 100 times your monthly instalment. This means, in case you aim to put Rs.20,000 a month through RSP, your sum assured will be Rs.20 lakh, if you stay invested for at least three years. In simple words, if the first unitholder (only the first unitholder gets entitled to the insurance cover) dies, the second unitholder or the nominee gets Rs.20 lakh as insurance claim. The maximum insurance cover is available for a value of Rs.20 lakh and/or till the unitholder attains the age of 55. If you stop the RSP before three years, but still continue to hold your units, your insurance cover stops. However, if the first unitholder dies before s/he completes three years in RSP, the nominee or the second unitholder can claim the insurance money.
Changing the game
But the moot focus of Birla Sun Life AMC is to warm up investors to debt funds. Most of us opt for fixed deposits and post office recurring deposits if we wish to systematically invest a sum every month into a debt instrument. By calling its new product ‘recurring savings plan’, Birla Sun Life AMC plans to hit two birds with one stone. One, it wants to offer an alternative to traditional fixed income products to the retail investors—driving his attention away from fixed deposits and towards MFs—and, two, it appears to position this product as a savings avenue as against an investment avenue. A proposition, Balasubramanian feels will catch the investor’s fancy faster. Here’s why.
Karan Datta, national sales head, Axis Asset Management Co. Ltd says while investors hate volatility and love predictability, MFs have built much of their retail business around equities. Since equities are volatile, investors invest in equities only when markets go up. They avoid equities when markets fall. “This makes the business very cyclical as more money comes into equity funds when equity markets do well and vice versa. As a result, the MF business has become cyclical,” says Datta. Balasubramanian claims that typically the term “investment” gets associated with market volatility, while “savings” gets associated with some sort of safety and predictability; something that RSP aims to offer. This is also why, though RSP calls for monthly investments just like SIP, Birla Sun Life AMC calls it an RSP.
Datta says that Axis AMC too, through its market research it undertook a couple of years ago, has realized that retail investors love safety and predictability and like products that offer these, instead of those that come with a high degree of volatility. Schemes such as Axis Triple Advantage Fund (ATAF) that invests around 30-40% in equity, another 30-40% in debt instruments and remaining 20-30% in gold, Datta says, resonate with investors more than other schemes from his stable. He says of the 4.25 lakh customers that Axis AMC has, about 30% investors invested in MFs for the first time ever, most having come through ATAF.
The other reason why fund houses are slowly warming to debt funds is the poor show of equities and SIPs in the last three years. Large-cap oriented schemes of some of the large fund houses we checked gave returns of just about 2-4% in the last three years through SIP, according to data provided by Value Research, mutual fund tracker. Their five-year return was in the range of 8% to 10%; something you’d have got in fixed deposits without taking risk.
According to data from Computer Age Management Services Pvt. Ltd (Cams) and Karvy Computershare Pvt. Ltd (two of the largest registrar and transfer agents), investors discontinued at least 1.66 million SIP accounts in 2011. According to Cams, SIP account cancellations per month almost doubled from 59,867 in January 2011 to 115,204 in December 2011. Says Ajit Menon, head of sales and marketing, DSP BlackRock Investment Managers Pvt. Ltd, “People are not really investing in equity funds. When they get about 9.5% from a bank fixed deposit, why should they take risk in equities to get just about 14% returns, is what they ask us these days. So these are days when fixed income gets accepted more by retail investors.”
But more than that, says Menon, is the realization by the MF industry that it has focused perhaps “a bit excessively” on promoting equity funds. “We should have promoted fixed income to the retail investor, and then perhaps got them to move to balanced funds and equity funds,” says Menon. Now investors are also realizing the importance of fixed income after seeing negative returns in equity funds.
Fund houses are getting sensitized to this trend. So if Axis AMC is hard selling its ATAF, DSP BlackRock recently launched its mobile phone platform to enable investors to invest their surplus cash into its ultra short-term debt fund—DSP BlackRock Money Manager Fund. Investors who have registered for this facility can send an SMS with the investment amount and money gets transferred automatically from his bank account to DSP BlackRock. Only one fund, a debt fund, is available on this platform. Menon says that since this is targeted to an investor’s excess savings in his bank account, only a low risk debt fund is on offer here. Reliance Capital Asset Management Co. Ltd too re-launched its Any Time Money Card (ATM card) to enable investors a better return than what s/he earns from a savings bank account and also offers liquidity by allowing withdrawals from a Visa-enabled automated teller machine (ATM) or HDFC Bank ATM.
Should you invest?
Most of the distributors and financial planners we spoke to said that RSP makes sense. “Those investors who are in the 20% and 30% income tax brackets must look at debt funds,” says Lovaii Navlakhi, a Bangalore-based financial planner. Navlakhi though recommends a time horizon of at least three to five years to get the best out of RSP.
Another Bangalore-based financial planner, Anil Rego thinks that “RSP keeps the message simple by using the word ‘recurring’ and would, therefore, know to expect something similar to what a recurring deposit does”. He says that those who are approaching their retirement years may look at this product, though Rego is not too happy with Birla AMC’s choice of funds. “A combination of a liquid fund and a bond fund would have boded well as long-term and medium-term bond funds are usually seasonal funds; sometimes liquid funds outperform, other times medium to long-term bond funds outperform,” says Rego.
If you have a three to five year financial goal or perhaps even a bit more, but are averse to taking a risk, we suggest you try RSP. The two schemes, in which RSP is available, come with a good track record. Birla MIP is also a part of Mint50— Mint’s chosen set of 50 MFs.
However, bear in mind three things: Firstly, avoid the lure of the insurance cover. It is an added facility, but should never be your first reason to invest in RSP. Secondly, though RSP is a low volatile product, its fortunes and returns are nevertheless linked to markets. Therefore, returns are not guaranteed. Lastly, this is not a recurring deposit that you get in a bank or post office. So don’t confuse RSP with a recurring bank deposit; they’re not the same thing.