BackPros and cons of a P-E based systematic transfer plan
In a systematic transfer plan, you put a lump sum amount in a debt fund (preferably a liquid or ultra short-term fund) and then transfer a fixed amount to an equity fund of your choice, in the same fund house, over a particular time period, say three to six months or even nine months to a year
Premium
IDFC Asset Management Co. Ltd has launched a new plan called Price-Earnings Systematic Transfer Plan (P-E STP). This STP comes with a twist.
It allows you to invest throughout a market cycle, as opposed to the normal STP that transfers your money from a debt fund to an equity fund in a fixed period of time. It may be innovative, but should you opt for it?
What is an STP?
You’ve read on these pages many times that one of the ideal and most disciplined ways to invest in equity mutual funds is through a systematic investment plan (SIP). In an SIP, you start out with a small amount and then invest a part of your regular income in it every month.
But what if you have lump sum money with you now?
Is there a way where you can you invest that amount systematically?
Enter STP. In an STP, you put a lump sum amount in a debt fund (preferably a liquid or ultra short-term fund) and then transfer a fixed amount to an equity fund of your choice, in the same fund house, over a particular time period, say three to six months or even nine months to a year.
P-E STP goes a step further. It allows you to invest over an entire market cycle.
Instead of transferring a fixed amount from your debt to the equity fund, it transfers a higher amount when the market valuations are low and the pre-determined amount—which you would have ordinarily invested through a normal STP—when the valuations are high.
The fund house has created three market zones, which determine how much money gets transferred:
*When the P-E ratio of S&P BSE Sensex is below 16 (called the green zone)
*When the P-E ratio of S&P BSE Sensex is between 16 and 19 (yellow zone)
*When the P-E ratio of S&P BSE Sensex is greater than 19 (red zone).
When markets are in the red zone (in other words, when valuations are high), your default STP amount gets invested.
When markets are in the yellow zone, twice your default STP gets invested.
And when the markets are in the green zone, 5 times the default STP amount gets invested.
In short, you buy more units when the markets are low.
What works...
The idea of ‘buy low, sell high is an age-old trick of investing in equity markets, and one that most of us forget or ignore.
Apart from channelling your investments into an equity fund in a disciplined manner—like in any other STP—THE PE STP ensures that you invest more during falling markets.
Further, by accounting for the market’s P-E, it takes a more scientific approach and accounts for valuations of the stocks and the market, rather than looking at just the absolute market levels, which don’t always mean much.
...What doesn’t
The P-E STP works best over a full market cycle. Since it is impossible to predict how long the market cycle would last, this STP could go on for a long period of time, with no end in sight. So, you may need to be prepared for the long haul.
Even if you decide to invest over a long time period, if the markets remain in the same zone, you would make almost the same sort of returns through P-E STP (all things being equal) as a normal STP.
Also, as some—or even many—of your instalments could end up being 5 times your default amount, you need to do some calculations to ensure that you put enough money as lump sum at the start, in your debt fund, so that your STP lasts for a full cycle.
Or you should be ready to refill your liquid fund when your existing balance nears to an end.
At present, there is no mechanism by which the fund house would alert you to do such a refill. Your adviser—if you have one—or you would need to keep a track of it.
What you should do
We love simplicity. For sure, it is good to buy low and sell high and IDFC’s P-E STP is a big step towards it.
However, a plain-vanilla SIP and STP too would work fine if you are disciplined investor.
The P-E STP is a bit tricky to follow through, unless you are a bit flexible about the tenure as well as the amount that you put in.
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