Wouldn’t you love to buy equities when the equity market is at a low and sell when they reach a high? As picture perfect a strategy as it sounds, it’s easier said than done. For one, you need to get your points of entry and exit right. Two, the markets can be volatile and by the time you realize that, you could miss your chance.
To counter this volatility, mutual funds offer tools such as systematic investment plans (SIP) and systematic transfer plans (STP) that allow you to buy more units in falling markets and less units in rising markets automatically without you having to track the markets with a microscope.
But a new product in the market goes a step further: put more money (and, therefore, also buy more units) in falling markets and less money in rising markets. While Benchmark Asset Management Co. Ltd calls it value investing plan, or VIP, HDFC Asset Management Co. Ltd calls it HDFC Flex STP and Reliance Asset Management Co. Ltd calls it Reliance Smart STEP. While Reliance’s plan works on a formula that it refused to divulge, we take a look at what HDFC and Benchmark mutual funds have on offer.
HDFC Flex STP
This works quite like a typical STP, wherein you invest a lump sum in a liquid or debt fund and then shift the proceeds to an equity fund of your choice within the same fund house at fixed intervals over a period of time. But here’s where the similarity ends.
As against a fixed amount that gets transferred, say every month, HDFC Flex STP transfers higher amounts when markets drop—and, therefore, the net asset values (NAV) of equity funds. A formula that takes into account what you have invested till now, the market value of that investment and the monthly predecided amount on which the quantum of the current investment depends.
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So, if the market value of investments is more than the cost price of the instalments made so far, the predetermined fixed instalment amount gets invested. However, if the market value is less than the cost of your investments, you put in more than what you had originally decided.
You can opt for any of the fund house’s debt schemes (liquid, ultra short-term, bond and so on) as well as its plan-vanilla diversified equity funds, including HDFC Prudence Fund, a balanced fund. You could choose daily, weekly, monthly or quarterly transfers.
Benchmark VIP offers two choices. Like HDFC Flex STP, you can invest a lump sum in Benchmark Derivative Fund and choose to transfer systematically to Benchmark S&P CNX 500 Fund (BS500), an index fund. Or you could choose to start a SIP that would transfer amounts from your savings bank account at fixed intervals and invest the proceeds in BS500. Here’s how it works.
The fund assumes that you would, typically, invest a fixed amount every month that would grow at a rate of 15% a year, or 1.25% a month. The fund calls this the target amount. Right after you make your first instalment, the fund starts to monitor the actual rate of growth. If your corpus growth is less than your target growth, the fund transfers the balance amount (fixed amount plus something extra) in BS500. However, if the portfolio value is more than your target amount, nothing gets invested as your target is already said to have been achieved.
How to choose
Choice of funds: It bodes well if you get a wider choice to invest. While Benchmark AMC allows only one fund where you can invest your proceeds in, HDFC Flex STP gives you a wider choice of funds, both at the source (liquid) fund as well as the target (equity) fund.
On the other hand, BS500 is an index fund and, therefore, does not carry any fund manager risk. A choice, or the lack of it, doesn’t quite matter here as BS500 aims to mirror the returns of S&P CNX 500 index, the fund’s benchmark index.
As we wait for other mutual fund houses to offer VIPs, you can open an online mutual fund investment account with Fundsindia.com, a relatively new online platform that enables you to buy and sell funds. Fundsindia.com also offers a VIP on all the equity schemes from the 27 fund houses that it offers. The portal’s VIP works much like Benchmark MF’s VIP. What’s the catch? Both the source fund and the target fund should be from the same fund house.
SIP or STP: While Benchmark MF offers you a choice between SIP and STP, HDFC Flex STP offers only STP. We feel the STP option is better than SIP as the latter comes with risk. In falling markets, like the one we saw in 2008, the amount that goes from your liquid fund to your equity fund grows larger. There’s a chance that your bank balance can get wiped out if the contributions go up and your bank balance is modest. Benchmark’s VIP entails you to fix an upper limit to your monthly transfers beyond which money won’t go out of your account in case you opt for an SIP.
Srikanth Meenakshi, director, Fundsindia says that a combination of SIP and STP bodes well for VIP. “You could systematically transfer your money from your savings bank account to a liquid fund. Then, do a VIP from your liquid fund to an equity fund.” What he means is that you could choose to transfer, say, Rs10,000 every month to a liquid fund and then choose to do a VIP of, say Rs5,000, to an equity fund. The amount that does not get transferred earns a marginally higher in your liquid or ultra short-term fund than what it would have earned otherwise in a savings bank account.
Open formula: When your fund house offers a flexible transfer plan, it bodes well if it also discloses the formula that determines your monthly transfer. Here’s where Reliance Smart STEP doesn’t excite us. Here, you can select four transfer plans depending on your budget. Each plan comes with three transfer amounts categorized as low, medium and high amounts.
For instance, Plan A is meant for someone who would like to transfer not more than Rs1,500 each month, while Plan D is meant for someone who would like to transfer as much as Rs30,000 each month. Based on Sensex’s level and a formula that the fund house has, it decides which of the three predecided amount options would go in your chosen equity fund. While the fund house claims that it has back-tested its results, we prefer to stick to those that are transparent about their formulas, especially when others don’t have a problem in giving out theirs.
Graphic by Yogesh Kumar / Mint